Introduction
In 2007, the Commonwealth wished to procure at least three air warfare destroyers (AWDs) to participate in the defence of Australia, regional security, the protection of Australia's wider interests and other operations. To that end, in October 2007, it entered into the Project SEA 4000 Alliance Based Target Incentive Agreement (ABTIA) with ASC AWD Shipbuilder Pty Ltd (ASC) and Raytheon Australia Pty Ltd (Raytheon). ASC, a wholly owned subsidiary of ASC Shipbuilding Pty Ltd, was to be the shipbuilder for the procurement program. Raytheon was the combat system systems engineer for the program.
Unsurprisingly for a project of the size, complexity and sophistication of that contemplated by the ABTIA, numerous other entities were involved in addition to the parties to that agreement. Thus, the ships were designed by a Spanish platform system designer, Navantia SA (Navantia), and the construction of various component parts of each ship, known as "Blocks", was initially subcontracted by ASC to four subcontractors, namely:
1. Donau Pty Ltd (formerly Forgacs Engineering Pty Ltd) (Forgacs) in Newcastle, New South Wales;
2. BAE Systems Australia Defence Pty Ltd (BAE) in Williamstown, Victoria;
3. MG Engineering S.A. Pty Ltd (MG Engineering) in South Australia; and
4. Navantia (in Spain).
ASC also retained responsibility for some Block construction and for the integration of various Blocks in order to construct the ships at its own shipyard at Osborne in South Australia.
These proceedings concern competing and contested payment entitlements under a subcontract entered into between ASC and Forgacs on 20 August 2009 (the Original Contract) and a subsequent agreement, referred to as a Second Heads of Agreement (the 2HA), entered into between those parties on 26 October 2012. There had been intervening formal variations to the Original Contract and informal arrangements outside the terms of the Original Contract between the parties prior to the entry into the 2HA but they are not material for the purposes of this case other than by way of background facts.
The 2HA, according to Recital C, was entered into "[i]n furtherance of promoting cost and performance efficiencies". This was put down, in the words of the primary judge (see Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd [2018] NSWSC 1273 at [16]), to problems that arose in implementing the Original Contract:
"… principally because, contrary to the expectations of both parties, a large number of design changes were made by Navantia to the ships. Those changes meant that the parties were unable to comply with the processes in the Original Contract for specifying the scope of work to be undertaken by Forgacs consistently with the timeframes set out in the contract. As a result, some work was delayed and other work was undertaken otherwise than in accordance with an approved Purchase Order. Those problems were exacerbated in 2011, when, following a dispute between ASC and BAE Systems, which had also been subcontracted to construct a number of Blocks, ASC allocated some additional Blocks to Forgacs, which had the result of placing further pressure on Forgacs to complete the work allocated to it by the agreed dates."
In late 2011, as the primary judge also noted (at [217]), the parties, in addition to implementing a change notification request procedure in respect of each design change, also:
"… abandoned the [Problem Analysis Report (PAR)] process [under the Original Contract] and, instead, followed a process by which ASC Field Engineers located at Forgacs' premises worked directly with Forgacs to identify solutions to production problems. However, the Original Contract was not formally amended to reflect those revised processes, leaving both parties exposed contractually."
Two features of the 2HA should at once be noted for the purposes of exposing how the issues on this appeal arose. The first feature is that, although the 2HA was entered into on 26 October 2012 ("the Effective Date"), certain key provisions contained in cl 2.1 relating to a new and very different regime than that contained in the Original Contract for the approval and payment of ongoing construction work would only come into effect on and from "the Transition Date" which was later than the Effective Date. The second feature is that the 2HA contemplated that there would be what was described as a "Baseline True Up", which the parties were to use all reasonable endeavours to complete by 14 December 2012. The 2HA conferred on ASC a contractual right to terminate the 2HA "if the Baseline True Up [was] not agreed by 28 February 2013".
ASC purported to terminate the 2HA on 7 June 2013 pursuant to its contractual right to terminate. As shall be seen, two very important issues in this case concern whether or not ASC had lost its contractual right to terminate on the basis that it elected to affirm the 2HA by its conduct in relation to the ongoing construction program after 28 February 2013, or on the basis that it did not exercise its right to terminate within a reasonable time.
Following the purported termination of the 2HA on 7 June 2013, the parties did not return to the strict terms of the Original Contract but instead followed procedures that they had followed immediately before entering into the 2HA.
On 2 May 2014, the parties entered into a Reservation Deed and a New Arrangements Deed. Under the former, they reserved all their respective rights in relation to their "Existing Arrangements" which was defined to mean:
"All of the agreements, arrangements and understandings entered into to the extent they are binding upon the Parties on the day before the Effective Date [2 May 2014] excluding this document and those agreements, arrangements and understandings binding upon the Parties pursuant to this document." (emphasis added)
The words to which emphasis has been given in this definition highlight the contractual uncertainty that existed between the parties at the time of entry of the Reservation Deed, and the fact that work had for a time been progressing under a series of arrangements that were outside the formal terms of the Original Contract.
The "New Arrangements Deed" of 2 May 2014 was styled the "NTE Contract", NTE standing for "Not To Exceed". The NTE Contract documented the arrangements between the parties with respect to the construction which had not been completed by Forgacs as at the date of that contract and specified a maximum amount payable to Forgacs in respect of the balance of the work remaining to be performed.
Forgacs delivered the last of the Blocks it was required to construct under the NTE Contract in December 2015 and, in accordance with the terms of the Reservation Deed, that deed came to an end on 7 January 2016. There then followed in February and March 2016 an exchange of invoices which crystallised the parties' competing commercial claims and positions, and which were underpinned by their competing contentions in relation to the Original Contract and the 2HA and the validity or otherwise of its purported termination by ASC in June 2013.
As the primary judge recorded at [39]:
"Forgacs raised a final claim for payment on 4 February 2016 in the sum of $3,418,567.51 (including GST) which is not disputed, although it has not been paid. On 16 February 2016, ASC issued Forgacs with an invoice for payment of 'Overpayment of Payable Fee in accordance with clause 21.9.1(d) of the [Original Contract]' totalling $25,603,700.10. It also made a claim for liquidated damages of $1,786,510, which was subsequently revised to $1,284,655.41. On 19 February 2016, ASC made a full demand under the Bank Guarantee, following which it recalculated the amount it claimed was owing to it and sent Forgacs an invoice in the amount of $4,642,381.82. In response, on 29 March 2017 Forgacs sent ASC two invoices claiming amounts in the alternative. The first invoice was for the sum of $40,680,346.30 (including GST). It is the amount Forgacs claims under the 2HA assuming that that agreement came into effect and was not terminated. The second invoice was for an amount of $30,776,013.40 (including GST) and comprises fees claimed by it on the basis that the 2HA came into effect but was validly terminated on 7 June 2013. That claim assumes that the amount payable by ASC in respect of the Payable Fee is to be calculated in accordance with the 2HA up until 7 June 2013 and that the Original Contract only governs the amount payable in respect of the Payable Fee after that date."
Proceedings were commenced on 27 May 2016 in the Technology and Construction List of the Equity Division and, after a series of amendments both to the original Summons and the Technology and Construction List Statement as well as to a Cross-Summons and Cross-Claim Statement filed by ASC, came on for hearing before Ball J in July 2018. With his customary clarity and precision, the primary judge summarised the issues before him (at [3] of his judgment) as follows:
"The question in this case is whether Forgacs is entitled to recover fees in accordance with the 2HA. That question raises a number of issues. The first is whether and, if so, when the relevant provisions of the 2HA came into effect. The second is whether, if the provisions altering the terms on which Forgacs would be remunerated did come into effect, ASC validly terminated the 2HA by notice dated 7 June 2013. The third is, if the termination was effective, what effect the 2HA had on the rights and liabilities of the parties. The fourth is whether ASC was induced to enter into the 2HA as a consequence of the misleading or deceptive conduct of Forgacs and, if so, whether ASC is entitled to recover damages calculated as the difference between the amount for which ASC is liable and the amount for which it would have been liable if it had not entered into the 2HA."
The first issue identified by the primary judge had two aspects: the first, namely whether or not the key provisions of the 2HA came into effect, reflected an argument advanced by ASC that, reading the 2HA as a whole, Baseline True Up had to be completed and agreed prior to the Transition Date; the second was that, if it did not have to be completed prior to that time, what was the Transition Date. As shall be seen, and somewhat remarkably, the definition of this important contractual term in the 2HA is far from clear.
The second issue identified by the primary judge also broke down into two sub-issues as has already been noted: first whether, by reference to the doctrine of election, ASC had lost its right to terminate by the time it purported to do so; and secondly (and alternatively) whether the termination occurred within a reasonable period of time after the contractual right to terminate arose (which was on 28 February 2013), it being common ground that no Baseline True Up was completed or agreed by that date (or subsequently).
The third issue principally related to the effect of a release contained in the 2HA on certain liquidated damages that had accrued under the Original Contract. It also concerned the effect of the 2HA on the calculation of the Payable Fee, and whether or not a clause of the 2HA operated with retrospective effect from the beginning of the Original Contract or, rather, only operated from the commencement of the 2HA.
Both parties enjoyed a measure of success in the proceedings at first instance, the primary judge finding that:
1. Completion of an agreement with regard to Baseline True Up was not necessary for the Transition Date to occur such that cl 2.1 of the 2HA and the release in cl 6.1 of the 2HA had come into effect;
2. The Transition Date was 28 February 2013 (this being the later of the two dates referred to in cl 4.1(a) of the 2HA) and not 14 December 2012, as Forgacs had contended;
3. ASC had not lost its contractual right to terminate for failure to complete or agree Baseline True Up by either election or by a failure to exercise that right within a reasonable time;
4. Notwithstanding a valid termination of the 2HA, cl 6.1 of the 2HA operated to release Forgacs from ASC's claim for liquidated damages;
5. Clause 2.1(a) of the 2HA operated to fix the Payable Fee at 12 percent of Payable Costs from the inception of the 2HA to the Transition Date, rather than from the inception of the Original Contract to the Transition Date; and
6. Following the termination of the 2HA, all amounts previously paid in respect of the Payable Fee (including amounts paid under the 2HA) were to be accounted for in calculating the Payable Fee under the Original Contract.
These findings resulted in the Court making a declaration that ASC was entitled, pursuant to cl 21.9 of the Original Contract, to the sum of:
1. $25,603,700.10 in respect of the Payable Fee Claim, as defined in the Further Amended Technology and Construction List Cross-Claim Statement; and
2. $4,600,528.71 in respect of the Additional Payable Fee Claim, as defined in the Further Amended Technology and Construct List Cross-Claim Statement
together with interest of $312,526.14 and $465,291.19 respectively. Various consequential orders for payment were also made given that a sizeable part of the amount declared to be owing had already been secured by ASC's call on a $20 million bank guarantee issued by Forgacs under the Original Contract prior to the commencement of proceedings.
All of the issues raised at first instance remain alive on this appeal with the exception of ASC's claim for damages for misleading or deceptive conduct which was dismissed by the primary judge. Its only continuing relevance is to a challenge to the primary judge's separate decision in respect of the costs of the proceedings at first instance (see [2018] NSWSC 1589).
Reflective of their varying levels of success and failure, both parties have appealed from different aspects of the primary judge's decision. The three principal issues before this Court may be stated as follows:
1. Whether the Transition Date as defined in the 2HA occurred, and if so, whether it occurred on 14 December 2012 or 28 February 2013 (Appeal Ground 1; Cross-Appeal Grounds 1-3);
2. If the Transition Date occurred, whether ASC validly exercised its right to terminate on 7 June 2013, or whether ASC either (i) had elected to affirm the 2HA or (ii) did not terminate the 2HA within a reasonable time (Appeal Grounds 2 and 3); and
3. If the Transition Date did occur, what was the effect (on the Original Contract) of the brief period during which the 2HA was in force, in respect of:
1. the liquidated damages release in the 2HA, on the assumption that ASC's termination of the 2HA was valid (Cross-Appeal Ground 4); and
2. the regime for the calculation of fees (Appeal Grounds 4 and 5).
As already noted, ASC has also challenged the primary judge's decision that each party bear its own costs of the proceedings (Cross-Appeal Ground 5).
Before turning to deal with each of these issues, it is necessary to set out in some detail relevant terms both of the Original Contract and the 2HA.
[2]
The Original Contract
Under the Original Contract, ASC was to issue "Block Work Packs" to Forgacs setting out the scope of work that Forgacs was to complete. Within 20 working days of receipt of a Block Work Pack, Forgacs was to provide ASC with a time and cost estimate for the work. If ASC accepted the estimate, within a further 20 working days of receipt of the estimate, it was to issue Forgacs with a Purchase Order. Alternatively, ASC could issue a Purchase Order with respect to a Block Work Pack based on its own estimates and prepared in accordance with the Contract. On issuance of a Purchase Order, Forgacs became obliged to complete the work in accordance with the Order.
The sum total of costs estimates in all Purchase Orders was referred to in the Contract as the "Target Cost Estimate" (TCE). In the case of changes to the scope of the work, or certain changes to costs, cl 21.11 of the Original Contract provided a mechanism for adjusting the TCE. Forgacs was also able, under the Original Contract, to produce a PAR documenting its questions with respect to production. ASC was obliged to review PARs and provide technical solutions to Forgacs in response.
Under the Original Contract, Forgacs was to be remunerated by reference to components termed "Payable Fee" and "Payable Costs". Payable Costs were in essence a reimbursement to Forgacs of costs incurred in carrying out the work (such as material, labour and overhead costs). The rates for Payable Costs were specified in the Original Contract. Payable Fee was set as a function (19 percent) of Payable Costs. The Contract also adopted a concept "Estimate at Completion" (EAC) used in the Australian Standard for "Project performance measurement using Earned Value". Clause 21.10 provided for the adjustment of Payable Fee by reference to Forgacs' performance as against the TCE under what was described as a "Pain:Gain regime":
"21.10.1 If the EAC exceeds the TCE, the Payable Fee will be reduced by 50 cents in every dollar that the EAC exceeds the TCE.
21.10.2 If the EAC is lower than the TCE, the Payable Fee will be increased by 50 cents in every dollar that the EAC is under the TCE. The amount of Payable Fee to [Forgacs] will be a maximum of double [Forgacs'] Target Fee".
Because the final amount payable could not be determined until completion of all work, cl 21.9.1(d) provided for the quarterly calculation of the expected fee based on actual performance to date and for the payment by ASC, or refund by Forgacs, of a proportion of the fee as adjusted at each Fee Payment Period:
"[I]f the Payable Fee exceeds the Payable Fee previously paid to [Forgacs] in the previous Fee Payment Period ASC will pay to [Forgacs] the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period. If the Payable Fee for that Fee Payment Period is less than the Payable Fee already paid to [Forgacs] by ASC, [Forgacs] will pay to ASC the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period."
The amounts payable were calculated using data from an "Earned Value Management System" (EVMS), which captured expected and actual performance data. The EVMS produced, inter alia, a "Cost Performance Index": the ratio, in relation to a particular date, of actual costs to budgeted costs; and a "Schedule Performance Index": the ratio of earned value (the work completed expressed in terms of the budget assigned to that work) to planned value (the budget sum of work scheduled to be completed within a particular period).
In accordance with the Original Contract, Forgacs provided a $20 million security to ASC for loss incurred by ASC by reason of default by Forgacs. This security was later replaced by a bank guarantee for the same amount.
Clause 18.1.1 of the Original Contract provided for the payment of liquidated damages by Forgacs to ASC in the case of late delivery:
"If [Forgacs] does not achieve an Acceptance by the relevant Acceptance Dates, ASC may, in its discretion, by notice to [Forgacs] at any time thereafter, impose on [Forgacs] a liability to pay ASC, by way of liquidated damages, a specified amount calculated in accordance with Attachment I. No amount shall be owing to ASC until ASC elects, to recover any such liquidated damages."
[3]
The 2HA
The 2HA was entered into on 26 October 2012 following a series of negotiations that had commenced towards the end of 2011. 26 October 2012 was the "Effective Date", defined in cl 1.1 of the 2HA.
Clause 1.1 also contained a definition of Transition Date as "the earlier of the date set out in clause 4.1(a) or the date upon which ASC Approves the Baseline True Up".
Clause 2.1 provided:
"The parties acknowledge and agree that the following provisions set out in this clause 2 will apply on and from the Transition Date:
(a) Payable Fee on all Payable Costs incurred prior to the Transition Date will be paid at twelve percent (12%);
(b) the TCE process set out in clause 7.3 of the Subcontract [that is, the Original Contract] will cease to operate and:
(i) ASC will provide Block Work Packs that define work scope;
(ii) Forgacs will provide a budget based on its work orders rolled up to Block Work Pack level for the issued work scope (Budget);
(iii) as soon as reasonably practicable after receipt of the Budget ASC will provide a written work authorisation;
(iv) Forgacs will only carry out and ASC will only be liable for work authorised by ASC by a written work authorisation;
(v) the labour rates and ODCs set out in Attachment C of the Subcontract will continue to apply to work conducted under a work authorisation;
(vi) all Payable Costs except Fixed Overhead will attract a margin of eight and a half percent (8.5%); and
(vii) Fixed Overhead will attract a margin of twelve percent (12%),
paid monthly in arrears (Base Fee);
(c) all Payable Costs except Fixed Overhead, will be subject to a performance based margin (Incentive Fee) which will:
(i) comprise of schedule based incentives calculated in accordance with Attachment A capped at one percent (1%) of Payable Costs incurred in the preceding month;
(ii) comprise of performance based incentives calculated in accordance with Attachment A capped at four and a half percent (4.5%) of Payable Costs incurred in the preceding three months;
(iii) be assessed on each individual month or quarter respectively, and not on a cumulative basis; and
(iv) be subject to review (including applicable scope and targets) three (3) months after the Transition Date and six (6) monthly thereafter.
(d) the Depreciation Charge remains unchanged and will not be subject to any Payable Fee or other margin;
(e) the Subcontract Liquidated Damages regime will cease to apply;
(f) ASC personnel will be integrated into the Forgacs project management decision process through involvement in Forgacs' internal production meetings and schedule discussions, and any amendments to Project Management structure or personnel numbers must be Approved by ASC;
(g) the EVMS will be retained and maintained but will not determine Payable Fee;
(h) Forgacs will store ASC steel plate relating to the AWDs at no cost;
(i) Forgacs will be provided with an opportunity within a discrete period at its cost to assess and elect to conduct repairs to any Defect or Latent Defect arising during the Warranty Period or Latent Defect Period respectively; and
(j) all other rights and obligations will continue in force."
Clause 4.1 of the 2HA headed "Baseline" provided that the parties acknowledge and agree:
"(a) to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 provided that if the Baseline True Up is not agreed by 28 February 2012 ASC may terminate this Agreement by providing written notice to that effect whereupon the parties shall have no further rights, claims or obligations with respect to the subject matter of this Agreement;
(b) the Schedule Baseline will apply from the Transition Date and will be maintained and updated monthly by Forgacs;
(c) upon Approval by ASC the Schedule Baseline will replace Attachment E of the Subcontract; and
(d) all proposed amendments to the Schedule Baseline must:
(i) be Approved by ASC prior to implementation; and
(ii) be facilitated by SDRL PCMS submission,
(e) Forgacs will deliver a CSAR and VARs report for each Block on a monthly basis for Approval by ASC."
It is common ground that the reference to 28 February 2012 in cl 4.1(a) is an error and should read 28 February 2013.
Baseline True Up was defined in cl 1.1 as meaning "ASC's review and Approval of the production baseline, EVMS, Configuration Status Accounting Report (CSAR) and Schedule Baseline for each Block to apply from the Transition Date". Schedule Baseline was itself defined in cl 1.1 as meaning "the schedule setting out at least the Shipping Dates for each Block that will apply from the Transition Date".
Clause 5.1, headed "Negotiation & Contract Amendment Proposal", provided:
"The parties acknowledge and agree that:
(a) as soon as reasonably practical after agreeing the Baseline True Up the parties will execute a Contract Amendment Proposal or other appropriate document as may be agreed between the parties to incorporate their agreement in relation to the matters set out in this Agreement into the Subcontract; and
(b) a failure or delay in executing a Contract Amendment Proposal shall not invalidate or render unenforceable any provision of this Agreement."
Clause 6.1 provided the following:
"Subject to the terms of this Agreement, on and from the Transition Date each party releases each other party and their employees, directors, servants, agents, assigns and any related bodies corporate (as defined in the Corporations Act 2001) (Related Persons) from all costs, expenses, losses, damages and liability (including legal costs) suffered, incurred or owing by the respective parties, and their Related Persons, and all claims, actions and proceedings (whether actual, present, future or contingent), arising from, under or in connection with any Extension of Time, TCE Adjustment Event or Liquidated Damages Amount arising under the Subcontract (whether in contract, tort or otherwise) and which arise, accrue or exist before the Effective Date."
Clause 6.4(a) provided that "subject to the express terms of [the 2HA]… the respective rights and obligations of each party under the Subcontract and at law existing as at the Effective Date of this Agreement are expressly preserved".
Clause 8.3 provided that "[e]ach party must take all reasonable action to give full effect to this Agreement".
Clause 8.7(b) provided:
"Any provision of this Agreement which is unenforceable or partly unenforceable is, where possible, to be severed to the extent necessary to make this Agreement enforceable, unless this would materially change the intended effect of this Agreement."
[4]
Baseline True Up Negotiations
After entering the 2HA, the parties commenced negotiations to agree a Baseline True Up. The Baseline True Up comprised three parts: Production Baseline; Schedule Baseline and CSAR. Production Baseline was a budget for all known scope of work completed and to be completed by Forgacs. This also necessitated agreement on the rates Forgacs would be paid for future work. Schedule Baseline was a schedule for yet to be completed work. Because scheduling required an understanding about the exact scope of the work, this could not be determined until production baseline was completed. The CSAR was a list of all documents and revisions on which the Production Baseline and Schedule Baseline were based.
These negotiations continued in good faith through to early June 2013 and it was and is common ground that, although the Production Baseline component of the Baseline True Up was completed in March 2013, negotiations for Schedule Baseline foundered and ASC never approved Baseline True Up. No Baseline True Up had been agreed or approved by ASC as at 7 June 2013 when it purported to terminate the 2HA.
[5]
Issues on Appeal
It is convenient to follow the formulation of issues as they have been set out at [22] above.
[6]
Did the Transition Date "occur"?
The first issue relates to the "Transition Date" under the 2HA, and ASC's contention, in its first ground of Cross-Appeal, that the primary judge erred in holding that it had "occurred" and that the primary judge should have concluded on the proper construction of the 2HA that it could not "occur" until the Baseline True Up had been approved under the terms of the 2HA. One consequence of this argument, if successful, would be that cl 2.1 of the 2HA did not come into effect.
The primary judge's reasoning on this issue is contained in [71] of his judgment as follows:
"The principal difficulty with the interpretation advanced by ASC is that it involves a major departure from the language used in clause 2.1 of the 2HA. As Forgacs points out, that clause plainly states that the changes set out in the clause "will apply on and from the Transition Date". "Transition Date" is defined as the earlier of two dates. One of those dates is the date upon which ASC "Approves" the Baseline True Up. The other is a date set out in clause 4.1. By defining the Transition Date as the earlier of two dates, one of which is the date on which ASC Approves Baseline True Up, the definition and clause must contemplate the possibility that the clause could come into effect before ASC "Approves" Baseline True Up. In giving ASC a right of termination if Baseline True Up is not agreed by 28 February 2013, the 2HA gives ASC but not Forgacs an option to avoid or ameliorate that consequence. It is true that the definition of "Transition Date" is concerned with the date on which ASC "Approves" the Baseline True Up. On the other hand, clause 4.1 is concerned with whether Baseline True Up has been "agreed". However, the 2HA is an informal agreement, not obviously drafted by lawyers. Lawyers may regard the drafting as sloppy, but it could not seriously be suggested that Approval by ASC and agreement by the parties to Baseline True Up were meant to convey different concepts."
In my opinion, the primary judge's conclusion that the Transition Date "occurred", with the consequence that cl 2.1 of the 2HA came into effect from that date, was clearly correct.
ASC's detailed submissions challenging the primary judge's conclusion on this ground commenced with a familiar reference to Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 (Mount Bruce) and the now trite observation that the meaning of the terms of a contract is to be determined by what a reasonable businessperson would have understood those terms to mean, requiring consideration not only of the language used by the parties but also of the surrounding circumstances known to them and the commercial purposes or objects to be secured by the contract. It is salutary to emphasise that, in their joint judgment in Mount Bruce, French CJ, Nettle and Gordon JJ stated (at [48]) that:
"Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning." (Footnote omitted)
So also their Honours emphasised that "context" may be discerned from the entire text of the contract in question.
An important part of the context emphasised by ASC was that the 2HA was not a stand-alone contractual document but, rather, expressed a "broad consensus on amendments the parties agreed would eventually be made to the complex contractual framework governing their relationship" and that "[w]hether or not the amendment envisaged by the 2HA would ultimately take place was subject to certain preconditions being met including, most relevantly, that the Baseline True Up would be completed" (emphasis added).
Pausing there, it may observed that the achievement of Baseline True Up is nowhere in the 2HA expressed to be a precondition to the 2HA or its key operative provisions coming into effect. The parties to the 2HA were both sophisticated, dealing with a multimillion-dollar procurement project. Not only would it have been simple enough for the parties to have said that Baseline True Up was such a precondition, if that is what they intended, but it is reasonable, in my opinion, to expect that they would have done so. The argument that "if the parties had intended one meaning, they could have said so" is frequently deployed in contractual disputes and it cannot be given too much weight because the richness of the English language is such as to be capable of expressing the same or similar concepts in a variety of ways: cf. K Lewison and D Hughes, The Interpretation of Contracts in Australia (2012, Lawbook Co) at [2.12]. That having been said, however, if the entirety of an agreement's operation is, or its key provisions are, intended to be preconditioned on the happening of a specific event, that is not a matter that will generally be buried or only left to appear by a process of implication, especially, it may be added, in circumstances where there was an ongoing business relationship and the parties' previous contractual arrangements had not proved to be particularly satisfactory.
ASC's written submissions recognised the force of such an argument but asserted that Baseline True Up was "fundamental to the new arrangements" and that it "simply [goes] without saying that the entire deal was predicated on the Baseline True Up being completed." This submission is inconsistent with the terms of the definition of Transition Date and the fact that it unambiguously contemplated that cl 2.1 may come into effect and operate prior to Baseline True Up being agreed or approved; it is also inconsistent with the fact that cl 4.1, in giving ASC a right to terminate if Baseline True Up was not agreed by 28 February 2013, necessarily contemplated that the 2HA could continue in force without agreement as to Baseline True Up being achieved. It was not suggested that the definition of Transition Date contained a mistake or should be construed other than in accordance with its plain and ordinary English meaning.
ASC's submission that Baseline True Up was a precondition to the 2HA necessarily rested upon a process of implication which, its submissions suggested, would more likely be drawn in circumstances where "[u]nlike the Original Contract, the 2HA ran to a mere six pages, and was not especially sophisticated or detailed". Putting to one side the fact that the 2HA in fact ran to some 15 pages when its attachment is taken into account, brevity ("a mere six pages") is not to be deprecated, just as the clarity of a document is not a function of its length. Moreover, the fact that the 2HA may not be particularly lengthy provides no basis for departing from the language used in it and the primacy to be given to the language, viewed in the context of the 2HA as a whole. Further, contrary to ASC's submission, cl 2.1 of the 2HA, set out at [34] above, provides a detailed statement of what is to occur on and from the Transition Date.
ASC founded its argument that the achievement of Baseline True Up was an implied precondition to the amendments envisaged by the 2HA taking effect on the following clauses of the 2HA which, it was contended, "properly construed, assume[d] or require[d] the completion of the Baseline True Up": cll 2.1(c), 2.1(g), 4.1, 4.2 and 5.1. The arguments based on each of these clauses will be dealt with in turn.
[7]
Clause 2.1(c)
At first instance, ASC had submitted that cl 2.1(c) could not operate until Baseline True Up had been achieved because the Incentive Fee referred to in that clause was only capable of being calculated following this event. Forgacs accepted this but submitted that this simply meant that it ran the risk of losing an entitlement to an Incentive Fee if Baseline True Up was not agreed. ASC submitted that this was a commercially unlikely consequence, but it could equally be observed that the risk would operate as a practical incentive to Forgacs to reach agreement on Baseline True Up, or simply that it was a risk Forgacs was prepared to take based upon its assessment at the time of contracting of the likelihood of agreement as to Baseline True Up being reached.
The primary judge, drawing upon the commercial context and background to the 2HA, rejected ASC's argument based on lack of commerciality. His reasoning, with which I agree and gratefully adopt, was as follows:
"[84] The 2HA was designed to address at least three main issues. One was the fact that the parties had departed from the terms of the Original Contract in substantial respects, leaving it uncertain what their respective rights and liabilities were. Both parties had an interest in resolving that uncertainty. A second was the fact that the procedures for dealing with variations needed to be simplified so that the parties could focus on completing the work the subject of the contract rather than spending time complying with the cumbersome requirements of the Original Contract. A third was the need to reach agreement on precisely what further work needed to be done and a schedule for that work. The first two objectives were achieved by the terms of the 2HA itself. The third could only be achieved through an agreement on Baseline True Up. Plainly, if Baseline True Up was agreed, there was no reason why the 2HA, and clause 2.1 in particular, should not take effect according to its terms. The question is what was to happen if, contrary to the expectations of the parties, they could not reach agreement on Baseline True Up. On the approach adopted by ASC, the parties were effectively placed in the position they were in before the 2HA was signed. On the approach adopted by Forgacs, ASC was given an option. It could terminate the 2HA. Alternatively, it could elect not to terminate the 2HA, with the result that it would not have the benefit of the Baseline True Up. From ASC's point of view, it would not be bound by the 2HA without agreement on the Baseline True Up if it did not wish to be. But it had an option to take some of the benefits of the 2HA without agreement on Baseline True Up and as compensation it would not have to pay an Incentive Fee. From Forgacs' point of view, it ran the risk of losing any right to an Incentive Fee if agreement was not reached on Baseline True Up. However, it still got the other benefits of the contract; and, in particular, obtained certainty that it would earn a Payable Fee that was at least 12 per cent of Payable Costs. Looking at the matter objectively, that does not strike me as an uncommercial outcome; and certainly not one which would justify doing violence to the language of the contract."
ASC made no attack on this reasoning in its submissions on appeal but, rather, suggested that the primary judge did not pay adequate regard to the other clauses upon which it relied for its implication argument.
Before turning to consider these clauses, the primary judge's analysis and his observation in the final sentence of the passage extracted above was entirely orthodox and, in my opinion, correct. Caution is required when resort is had (as ASC did) to assertions of "commercially unlikely consequences" as a reason for departing from the language parties have in fact used: see, for example, Jireh International Pty Ltd t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137 at [55]; Cushman & Wakefield (NSW) Pty Ltd v Farrell [2017] NSWCA 24 at [71]; Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78 at [20]. "Business commonsense" is also a topic upon which minds may differ, and what a lawyer may surmise to amount to business commonsense may be far removed from the true position, whether because of a general lack of understanding of commerce, or because of an information deficit as to the commercial positions of both parties and their larger commercial concerns. Indeed, as Spigelman CJ observed writing extra-judicially, "when the matter comes to the level of litigation, each party remains convinced that 'a business like' interpretation or 'business commonsense' happens to coincide with its own commercial interests": "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 ALJ 322 at 330.
[8]
Clause 2.1(g)
It will be recalled that this clause recorded an acknowledgement and agreement that, from the Transition Date, "the EVMS will be retained and maintained but will not determine Payable Fee".
ASC submitted that this clause also presupposed the approval of the Baseline True Up. The submission was that review and approval of the EVMS formed part of the Baseline True Up and that, from a practical point of view, the EVMS could only be maintained if it had been reviewed and approved by ASC and that was only certain to occur if Baseline True Up had been achieved. ASC further submitted that the obligation to "retain and maintain" the EVMS implied that, when that obligation arose, the EVMS would already have been approved as part of the Baseline True Up.
EVMS was not defined in the 2HA although it is referred to in the definition of and as part of the Baseline True Up: see [37] above. EVMS was, however, defined in the Original Contract and cl 1.2 of the 2HA provided that words and expressions used in but not separately defined in the 2HA have the meanings given to them in the Original Contract. Accordingly, EVMS when used in the 2HA, had the meaning attributed to it in the Original Contract which was as follows: "the earned value management system conforming with the requirements of an Approved Earned Value Management Plan".
The natural construction of cl 2.1(g) and, in particular, the words "retain" and "maintain" seem clearly to be a reference to something which was in existence prior to the operation or coming into effect of the 2HA or, at least, prior to the Transition Date. This interpretation is reinforced by the use of the definite article "the" in cl 2.1(g). Whilst it is true that part of the Baseline True Up exercise included a review and approval of, inter alia, the EVMS, that is a reference to the EVMS as it existed prior to entry into the 2HA. As the primary judge held at [69] it was not necessary to agree on the Baseline True Up in order to maintain the EVMS. His Honour went on to say that:
"It may be that the EVMS could not be used for all it could have been used if Baseline True Up had been agreed and included in the system. However, the parties did reach agreement on many of the components of the Baseline True Up. To the extent that agreement could be reached, the relevant data were included in the system and in that way Forgacs was able to maintain the system following execution of the 2HA."
To the extent that ASC's submissions called in aid practical considerations surrounding the utility of a review of the EVMS without finalisation of the Baseline True Up, Forgacs pointed out that such an assertion was also inconsistent with evidence which had been given by Mr Cuthill of ASC under cross-examination. That evidence [tp. 169.35-43] was as follows:
"Q. Then, we have at (g), "The EVMS will be retained," and in fact, I think, you say in your affidavit at paragraph 242, that your understanding was that Forgacs continue to maintain its EVMS between the execution and termination of the second heads of agreement, page 84 of your affidavit.
A. Yes.
Q. So, you agree that the EVMS could be retained and maintained, and in fact, it's your evidence that you understood that it was?"
A. Yes."
For the foregoing reasons, including those given by the primary judge, cl 2.1(g) does not support ASC's "implication" argument.
[9]
Clause 4.1
Clause 4.1 has been set out in [35] above. ASC's argument by reference to this clause drew upon its reference to Schedule Baseline which was defined in cl 1.1 of the 2HA and formed part of the definition of Baseline True Up.
ASC's argument in respect of this clause was similar to its argument with regard to cl 2.1(g), namely that, as agreement or approval to the Schedule Baseline formed an element of the Baseline True Up, it was to be inferred that the Schedule Baseline would not be agreed unless and until Baseline True Up had been agreed and approved.
I do not find this argument at all persuasive. Just because an overall exercise may involve a series of component parts, it does not follow that those component parts must be completed at the same time as the overall exercise, nor does it follow that they will not be undertaken without the overall exercise being completed.
[10]
Clause 5.1(a)
The terms of cl 5.1 have been set out at [38] above. ASC submitted that it made no commercial sense for the 2HA to be formalised only in the event that the Baseline True Up was agreed, but for its operative provisions to come into effect regardless of whether the Baseline True Up occurred. ASC submitted that cl 5.1 was a strong indicator that the Baseline True Up was a prerequisite for the substantive aspects of the 2HA to bind the parties.
In answer to this submission, Forgacs pointed to cl 5.1(b) which was to the effect that "a failure or delay in executing a Contract Amendment Proposal [which, by sub-cl (a) was to occur as soon as reasonably practical after agreeing the Baseline True Up] shall not invalidate or render unenforceable any provision of this Agreement". Clause 5.1(b) undermines any strength which ASC's argument based on cl 5.1(a) might otherwise have had. Forgacs also calls in aid the primary judge's observation (at [88]) that the 2HA did not become unworkable because, in the events that happened, namely the failure to agree Baseline True Up, the parties never came under an obligation to execute a Contract Amendment Proposal. A short form contract is no less a contract simply because a contemplated fuller contractual document is not executed, at least in circumstances where the execution of a formal document is not a condition precedent to formation in the Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72 sense.
[11]
Conclusion
None of the various clauses relied upon by ASC, either alone or taken in conjunction, alter the language or effect of the plain words used in the definition of Transition Date which makes it plain that the Transition Date will occur on the earlier of the two specified events. In circumstances where the first event is a calendar date, it matters not that the second event, the approval of Baseline True Up, never occurred. Nor did ASC's various arguments explain how the argument that agreement on Baseline True Up was a precondition to cl 2.1 coming into effect could sit with the definition of Transition Date and its express contemplation that it may occur prior to any agreement as to Baseline True Up being reached. The language used in that definition and its implications for ASC's argument cannot simply be ignored. ASC offered no alternative construction of the definition of Transition Date that would accommodate its argument to the effect that Baseline True Up was a precondition to cl 2.1 coming into effect.
A further answer to ASC's argument is supplied by cl 4.1(a) which gave to ASC a right to terminate the 2HA if the Baseline True Up was not agreed by 28 February 2013. Implicit in that clause are the twin propositions that the agreement can be operative and in effect prior to Baseline True Up being agreed or approved and, most importantly for present purposes, that the 2HA may continue in existence even though no agreement to Baseline True Up was reached. It is certainly the case that the parties in the 2HA, proceeded on the basis that Baseline True Up was likely to be agreed but that fact did not, in my opinion, make agreement to or approval of Baseline True Up in any sense a condition precedent either to the 2HA coming into effect or to cl 2.1 coming into effect.
[12]
What was the Transition Date?
The conclusion that the Transition Date occurred does not say anything about when that date actually was. As I have noted at [16] above, for such a key contractual concept (for it was from the Transition Date that the provisions of cl 2.1 of the 2HA took effect), it is surprising that the content of this term was not clearly defined.
It will be recalled that cl 2.1 of the 2HA provides that cl 2 comes into effect on the "Transition Date", and that the Transition Date was defined as the earlier of the date set out in cl 4.1(a) and the date on which ASC approves Baseline True Up. The latter of those dates did not occur. Clause 4.1(a) refers to two dates: 14 December 2012 (the date by which parties were to use all reasonable endeavours to complete Baseline True Up); and 28 February 2013 (the date from which, if Baseline True Up was still not agreed, ASC was entitled to terminate the 2HA).
The primary judge found that the Transition Date was 28 February 2013. His Honour considered this outcome reflected the likely intention of the parties and rejected Forgacs' contention that the 2HA came into effect on 14 December 2012 on the basis that that construction would result in an "inevitable hiatus" between the key provisions of cl 2.1 coming into effect on that date and ASC having an entitlement to terminate on 28 February 2013, some two and a half months later. The essence of the primary judge's reasoning was as follows:
"[97] The principal reason advanced in favour of 14 December 2012 being "the date set out in clause 4.1(a)" is that ASC obtained a right to terminate the contract on 28 February 2013. The submission appears to be that it makes no sense for the parties to give ASC a right to terminate the contract immediately after it came into effect if Baseline True Up had not been agreed. However, that is not so. If the date is 28 February 2013, that would mean that ASC could avoid the position where it ever became bound by the obligations set out in clause 2.1 if Baseline True Up was not agreed prior to 28 February 2013. It would not be bound by those obligations before 28 February 2013 because the Transition Date would not occur before that date. It could avoid being bound by those obligations after 28 February 2013 by terminating the contract immediately. On the alternative interpretation, there would be an inevitable hiatus if ASC elected to exercise a right of termination. The Transition Date would occur no later than 14 December 2012. Consequently, the obligations imposed by clause 2.1 would come into effect on that day. Again, assuming that Baseline True Up was not agreed, they would remain in effect at least until 28 February 2013, because ASC had no right of termination until then. That is not something that the parties are likely to have intended."
On appeal, Forgacs repeated its contention that the Transition Date was 14 December 2012. In response to the primary judge's reference to the "hiatus", Forgacs pointed out that, unless ASC exercised its right to terminate for failure to agree Baseline True Up at 12.00am precisely on 28 February 2013, ASC's payment obligations under the 2HA would have arisen in any event such that there would still be a hiatus.
The primary judge was conscious of this argument, and sought to address it at [98] of his judgment by noting two points: first, that, on his preferred construction, ASC could avoid any practical hiatus by terminating immediately on 28 February 2013 if Baseline True Up had not been agreed; and, secondly, that the length of any hiatus would depend upon how quickly or otherwise ASC was required to exercise its rights to terminate in the absence of agreement as to Baseline True Up. As to the first point, there is a real degree of artificiality, with respect, with the analysis which would only see the hiatus avoided if the contractual right to terminate for lack of agreement was exercised on the stroke of midnight. The second point, whilst accurate, does not really supply an answer to Forgacs' argument that, on either date, there was likely to be a hiatus.
In my opinion, the hiatus argument which lay at the centre of the primary judge's reasoning on this issue is not attractive and does not supply a convincing reason to prefer the date of 28 February 2013 over 14 December 2012. An analysis of the text, particularly when considered together with the rules of interpretation incorporated into the 2HA from the Original Contract, supplies a textual answer to the issue of which was the applicable date.
Although there are two dates referred to in cl 4.1 of the 2HA, the date "set out" in cl 4.1 (to use the language of the definition of Transition Date) by which the obligation in the clause was to be performed was 14 December 2012. The second date referred to was the date contained in a proviso to cl 4.1, albeit that the proviso was built into the same clause. It might also be added that, given that the parties wished the operative date to be the earlier of a number of possibilities, the first of these possibilities in the absence of an agreement to Baseline True Up prior to 14 December 2012, namely 14 December 2012, was the date that the parties should be taken to have most likely intended.
This construction is also supported by cl 1.3 of the 2HA which provided that cl 1.4 of the Original Contract applied to the 2HA mutatis mutandis. Clause 1.4 of the Original Contract was the interpretation provision and cl 1.4.2(d) was to the effect that "a singular word includes the plural, and vice versa." Applying this rule of interpretation to the definition of Transition Date in the 2HA, that term may be read as meaning "the earlier of the dates set out in cl 4.1(a) or the date on which ASC Approves the Baseline True Up." The earlier of the dates set out in cl 4.1(a) of the 2HA was obviously 14 December 2012.
The construction favoured by the primary judge and his preference for 28 February 2013 as opposed to 14 December 2012 can also be tested by postulating a scenario where Baseline True Up had been agreed at a date between 14 December 2012 and 28 February 2013. For the sake of the hypothesis, let it be assumed that Baseline True Up was agreed or approved on 1 January 2013. On the primary judge's analysis, 1 January 2013 would be the Transition Date because the agreement occurred prior to 28 February 2013. But this result sits uncomfortably with the definition of Transition Date which speaks of the earlier of the dates set out in cl 4.1 and the date on which "ASC Approves Baseline True Up" (relying on the analysis in [79] above). On any view, 14 December 2012 was one of the dates set out in cl 4.1 and it is earlier in time than 1 January 2013. There is no rational or logical reason for ignoring the reference to 14 December 2012 or holding that it could not supply the Transition Date. It would also be a very odd result, in my opinion, for the Transition Date, by reference to which key provisions of the 2HA became operative, also to be the very (and first) date on which the 2HA could be terminated.
For these reasons, in my opinion, the primary judge erred in concluding that the Transition Date was 28 February 2013. In my opinion, the correct date was 14 December 2012.
Forgacs also argued that the "inevitable hiatus" that concerned the primary judge had a commercial explanation namely to provide an incentive for Forgacs to try and achieve the Baseline True Up before 28 February 2013 whilst simultaneously giving ASC an opportunity to consider whether it wished to go on with the 2HA even without agreement on Baseline True Up. There is some force in this submission but I do not need to rely on it to sustain the conclusion I have reached. It is sufficient to note that the argument sits comfortably with the analysis I favour.
Forgacs also submitted that the conclusion that the Transition Date was 14 December 2012 was consistent with discussion papers preceding the 2HA. I do not rest any part of my conclusion on this material.
[13]
Did ASC lose its right to terminate by election?
The primary judge found that ASC had validly terminated the 2HA on 7 June 2013. In doing so, his Honour rejected the submission made by Forgacs that ASC had elected to affirm the contract after 28 February 2013 by subscribing to the procedures of the 2HA in circumstances where he found that the parties had been following such procedures prior to the Transition Date (that is, prior to any contractual obligation to do so) such that the continuation of such conduct after 28 February 2013 was equivocal.
Whilst the primary judge's decision proceeded by reference to his finding that the Transition Date was 28 February 2013 as opposed to 14 December 2012, the conduct relied upon by Forgacs as manifesting an election had commenced prior to 14 December 2012 as well so that the difference in my conclusion as to the Transition Date does not in fact impact upon the primary judge's reasoning on the election issue.
The primary judge noted that the act constituting an election must be unequivocal in the sense that "it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other": Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646; [1974] HCA 40 per Stephen J. After also referring to Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at 30; [1993] HCA 27, the primary judge went on to state (at [104]) that "[t]he mere fact that a party's conduct is consistent with a continuation of the contract does not necessarily amount to an election to affirm the contract. The question is whether, having regard to all the facts, the conduct can only be explained as involving a decision to affirm the contract rather than to terminate it." He then referred to the decision of Glass JA (with whom Street CJ agreed) in Champtaloup v Thomas [1976] 2 NSWLR 264 at 269 (Champtaloup) where his Honour had said:
"It is always necessary to examine the conduct relied upon as an affirmation in its particular evidentiary setting. The question must then be answered whether the party able to rescind has communicated to the other party an unequivocal election to affirm, i.e. to renounce its right to rescind. The materials upon which the decision is to be made will include any reservations which have also been communicated. The answer to be given is a decision of fact based upon all the evidentiary data. There is no overriding principle of law that an act done under the contract will always communicate the decision to affirm, regardless of the surrounding circumstances."
Whereas, at trial, Forgacs had relied upon three separate matters as evidencing an election by ASC to affirm the contract after its contractual right to terminate had accrued, on appeal Forgacs pointed only to ASC's failure to issue Purchase Orders from on or about 5 November 2012 (as required under cl 7 of the Original Contract) as evidencing a critical change in practice from the Original Contract and an unequivocal election to affirm the 2HA.
As to the non-issuing of Purchase Orders after 5 November 2012, ASC submitted that the practice had been abandoned "nearly four months before the right to termination arose", and observed there was nothing to preclude ASC from issuing Purchase Orders retrospectively, which it maintained had occurred since the "early days" of the Original Contract.
ASC submitted that the parties' conduct after 28 February 2013 was equivocal for the same reasons stated (at [110]) by the primary judge, namely that the fact that, after 28 February 2013, ASC followed the procedures set out in cl 2.1(b)(i)-(iv) of the 2HA was:
"... equally consistent with a decision by ASC to follow the procedures the parties had already been following pending a decision on whether to exercise a right of termination or not, which itself depended on what happened in relation to the parties' continuing negotiations on Baseline True Up. There is no suggestion that Forgacs suffered any prejudice as a consequence of ASC's conduct. The position may have been different if ASC had insisted on compliance with the procedures set out in the 2HA. But that is not what happened. Rather, both parties were content to continue to do what they had done before the Transition Date while negotiations on Baseline True Up continued. In this respect, ASC's conduct bears some similarity to the conduct of the purchasers in Champtaloup v Thomas. In both cases, the party said to have made the election acted in a way that was consistent with the contract, but in neither case did the party insist on a right in a way that was only consistent with a decision to elect to obtain the benefits of the contract rather than to reserve its position on whether to terminate or not for a time." (Emphasis added)
In Champtaloup, there had been an express reservation of contractual rights. There was no such express reservation in the present case, a fact which makes the assessment as to whether there was an election more, rather than less, difficult.
Forgacs was critical of the primary judge's reliance on the parties' conduct prior to cl 2.1 of the 2HA coming into effect, emphasising that election required a focus upon conduct after the time when ASC could either affirm the 2HA or terminate it. In its reply submissions, however, it did recognise, by reference to the decision of Judd J in Epworth Foundation v Healthcare Imaging Services (Victoria) Pty Ltd [2009] VSC 293 at [147], that prior events and circumstances may inform the analysis of the conduct said to give rise to the election and, in particular, whether such conduct was equivocal or not.
I agree with the primary judge's reasoning on the question of election, as reproduced in [89] above. Further, the fact that the parties continued to seek to agree Baseline True Up after 28 February 2013 and that ASC had, by implication, a reasonable time after that date within which to terminate the 2HA also served to obscure ASC's conduct in terms of what it may have been taken to communicate. Indeed, the imprecise nature of what a reasonable time was within which to exercise the right to terminate, when coupled with the parties' tendency to operate outside the precise terms of their contractual arrangements (the very matter that had led to the 2HA), deprived ASC's conduct of the necessary clarity that would, in my opinion, be required to sustain a conclusion that there had been an unequivocal election.
[14]
Did ASC fail to exercise its right of termination in a reasonable time?
ASC purported to terminate the 2HA on 7 June 2013, some three months and one week after 28 February 2013 when it became entitled to do so, no agreement in respect of Baseline True Up having been secured by that date. The primary judge held that this right was exercised within a reasonable time of it having accrued.
The essence of the primary judge's conclusion in this regard is set out in his judgment as follows:
"[120] The question, then, is whether ASC exercised the right within a reasonable time. I have concluded that it did. The context in which the right arose suggested that it was important that the right be exercised promptly if it was to be exercised at all because of the hiatus arising from any delay. However, it is relevant that the parties had already been operating under that hiatus for a substantial period of time. Many of the things contemplated by clause 2.1 of the 2HA had already been put into place before the Transition Date and before the right of termination had arisen. Consequently, this was not a case where the occurrence of the Transition Date brought or was expected to bring about major changes to the way that the parties operated at a practical level, with the result that it was important for them to know promptly whether those changes needed to be made. Rather, the principal effect of the occurrence of the Transition Date was to give contractual force to the way in which the parties were already operating.
[121] Nothing of substance changed in the way the parties operated after 28 February 2013. In particular, ASC did not insist on any of its rights under the 2HA but instead continued with the negotiations of Baseline True Up. It must have been apparent to Forgacs from those matters that ASC wanted Baseline True Up to be agreed and it was willing to give the parties more time to attempt to reach agreement before exercising its right of termination. It is not suggested that ASC failed to carry out those negotiations diligently or that it should have appreciated earlier on that further negotiations were futile. Nor is it suggested that Forgacs was prejudiced by the delay. In those circumstances, in my opinion, it was reasonable for ASC to have waited until 7 June 2013 before terminating the 2HA." (Emphasis added)
These paragraphs were influenced in part by the primary judge's holding that the Transition Date was 28 February 2013 as opposed to 14 December 2012. For the reasons already given, that is a conclusion with which I do not agree, and that difference necessarily affects the primary judge's reasoning on the question of reasonable time.
In the second sentence of [121] of his reasons, the primary judge did not identify what the rights under the 2HA were that ASC did not insist upon after 28 February 2013 but, from the context, it does not appear that he was referring to the right to terminate. Whatever rights his Honour was referring to, it is difficult to see how this fact could in effect operate to extend what would otherwise have been a reasonable time within which to exercise a unilateral right to terminate the 2HA.
The question of whether a reasonable time for the termination of the 2HA had passed by 7 June 2013 needs to be assessed in light of my conclusion that the Transition Date was in fact 14 December 2012 and that the provisions set out in cl 2.1 of the 2HA were contractually operative from that date. Although the right to terminate did not arise until 28 February 2013, cl 2.1 of the 2HA had been operative for almost 6 months by the time ASC purported to exercise its contractual right to terminate the 2HA.
Forgacs submitted that his Honour failed to have regard to authorities on the standard for when a reasonable time expires and placed particular reliance upon Ballas v Theophilos (No 2) (1957) 98 CLR 193; [1957] HCA 90 (Ballas), submitting that, in the absence of a standstill agreement to preserve its rights, ASC was only entitled to a very short period of time in order to exercise its contractual right to terminate, and that period had well and truly elapsed by the time ASC came to exercise the right on 7 June 2013. For reasons given below, I accept that submission.
It is first necessary to consider the applicable legal principles.
[15]
Applicable legal principles
His Honour summarised the applicable legal principles as follows:
"[115] It is often said that where the time for performance of a contractual obligation has not been specified, 'the law implies that it is to be performed within a reasonable time': Canning v Temby (1905) 3 CLR 419 at 424 per Griffith CJ; [1905] HCA 45. To similar effect is the statement of Dixon J in Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 that '[a]n implication of a reasonable time when none is expressly limited is, in general, to be made unless there are indications to the contrary': at 13. It is accepted that that general observation includes cases involving a contractual right of termination. So, for example, in Elders Ltd v Incitec Pivot Ltd [2006] SASC 99, Debelle J considered that it was implicit in a term providing for a right of termination if no agreement on ongoing trading terms were reached by 1 December of a given year that the right be exercised within a reasonable time after 1 December: at [90].
[116] What constitutes a reasonable time is a question of fact which will depend on the context in which the right arises and the circumstances of each particular case: see Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at 26 per Dixon CJ, McTiernan, Fullagar and Kitto JJ. As Brennan J said in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, '[i]ts limit is determined by reference to what is fair to both parties' at the time of the exercise of the right: at 567-8; [1982] HCA 29; see also K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2012] NSWCA 117 at [48] per Meagher JA (with whom Macfarlan JA and Tobias AJA agreed), citing Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 444 per McHugh JA (with whom Priestley JA agreed)."
To the authorities cited by the primary judge may also be added the decision of this Court in Ellmore (Maitland) Pty Ltd v Tull (1995) 7 BPR 97,552.
One important observation that needs to be made with regard to the primary judge's exposition of principle relates to his statement that the limit of what is a reasonable time is to be determined by what is fair to both parties at the time of the exercise of the right. The passage cited from Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29 (Perri) does not indicate when the content of what is a reasonable time is to be assessed. It does not stand for the proposition that it is to be assessed at the time of the actual exercise of the right, although that is of course the point of time by reference to which the court will assess whether a reasonable time (within the meaning of the contract on its proper construction) has passed. This is a subtle but important distinction. In my opinion, the relevant time for considering what is in fact a reasonable time is the time at which, under the contract, the right which is to be exercised is first capable of being exercised (just as the time for assessing whether a notice to complete affords a reasonable time for completion is the time of the giving of the notice: see Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 444). As I point out at [109] below, the time for ascertaining the legal meaning of "reasonable time" must be the time of contracting.
The implication of reasonable time drawn in Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1; [1946] HCA 48 (Reid) referred to by the primary judge in the passage extracted above was an implication in respect of the exercise of a right as opposed to the performance of an obligation (although the cases referred to by Dixon J in support of the implication were all cases concerning the latter). So too, this Court's decision in K & M Prodanovski Pty Ltd v Callidan Insurance Ltd [2012] NSWCA 117 to which the primary judge also referred concerned the exercise of a contractual right.
In the course of argument, I raised with the parties the question whether or not there was any difference in principle between the concepts of "a reasonable time to perform an obligation" and "a reasonable time to exercise a right". Their respective researches did not point to any difference being drawn in the authorities, and it has been held that whether or not a reasonable time has passed either for the performance of an obligation or the exercise of a right is a question of fact or one of mixed fact and law (see, for example, Lyon v Creati (1892) 18 VLR 629 at 630; The Picturesque Atlas Co Ltd v Searle (1892) 18 VLR 633 at 639).
What is a reasonable time in any given case may be affected by the nature of the obligation to be performed (for example, whether it is dependent on some third party performance or circumstances outside the control of the party under the obligation) or the right to be exercised (for example, whether the right is dependent upon the provision of some information that may need to be assessed before the right can be exercised or simply upon the happening of an event or the passing of a particular time).
In Ellis v Thompson (1838) 3 M & W 445; 150 ER 1219, cited by Dixon J in Reid, Baron Alderson said (at 456-457; 1224-1225 of ER) that:
"It seems to me the correct mode of ascertaining what reasonable time is in such a case as this, is by placing the Court and jury in the same situation as the contracting parties themselves were in at the time they made the contract: that is to say, by placing before the jury all those circumstances which were known to both parties at the time the contract was made, and under which the contract itself took place. By so doing, you enable the Court and jury to form a safer conclusion as to what is the reasonable time which the law implies, and within which the contract is to be performed." (Emphasis added)
The question referred to in [103] was animated by the fact that in Perri, where Sir Gerard Brennan said that the limit of reasonableness was "determined by reference to what is fair to both parties", his Honour was talking about an obligation to fulfil a condition. In that case, the obligation was the sale of a property owned by the purchasers of another property the subject of a contract for sale and the issue was what was a reasonable time within which such a sale should be effected. That is and was a very different case from the present where what was involved was a consideration of what was a reasonable time for the exercise of a right to terminate the 2HA, no agreement having been reached by the parties as to Baseline True Up by 28 February 2013. That right came into existence on 28 February 2013, and all that ASC needed to do was to decide whether or not to exercise it.
So also, Maynard v Goode (1926) 37 CLR 529; [1926] HCA 4 (Maynard), to which Brennan J referred in Perri, and which appears to have been the source of his Honour's linking of reasonableness to what was fair between both parties, was a very different case to the present. Two passages from the decision of Isaacs J in Maynard should be noted at this point, and it will be necessary to return to them in due course. At 538, his Honour observed:
"The consequence of a departure from compliance may have very different results in the different jurisdictions. The conduct of one of the parties may render it unfair for him to profit by the failure of the other to adhere to the requirement of the contract as to time, whether definitely fixed or indefinitely stated as 'reasonable' (Stickney v. Keeble). But that does not affect the question of whether or not the requirement is complied with in point of fact or law." (Footnote omitted; emphasis added)
The "different jurisdictions" to which Isaacs J was referring were, of course, law and equity, with the availability of termination in the latter being subject to doctrines such as relief against forfeiture and estoppel. Later in his judgment (at 539), Isaacs J said this:
"Looking, for this purpose, at the position of the parties as they reciprocally stood on 1st February 1924, the date of the contract, the words 'in reasonable time' should be interpreted as meaning within such time as might enable the purchaser with ordinary despatch to comply with any possible requirements of the law and administration of the Crown Lands Acts, but not such delay as to cause or threaten prejudice to the position of the vendor under the contract." (Emphasis added)
I do not understand the last 19 words of this passage to equate the meaning of "in reasonable time" with absence of prejudice to the counterparty but, rather, as setting an outer limit beyond which performance of the obligation could not be said to have occurred within a reasonable time. That outer limit would not necessarily be coterminous with a "reasonable time".
The other significant point to note about this passage is that the legal meaning of what is a reasonable time is to be ascertained as at the date of the contract, although what will be reasonable as a matter of fact will inevitably fall to be assessed by reference to circumstances as at the date on which the right is first capable of being exercised (or the date on which the obligation falls to be performed), viewed in the context of the contract as a whole. This accords with the passage from Ellis v Thompson cited above, and is also consistent with the endorsement in Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35] by Gummow, Hayne and Kiefel JJ of Lord Reid's statement in James Miller & Partners Ltd v Whitworth Street Estates (Manchester) Ltd [1970] AC 583 at 603 that "... it is not legitimate to use as an aid in the construction of [a] contract anything which the parties said or did after it was made." (Emphasis added)
On the facts of the present case, that observation dictates that the fact that negotiations as to Baseline True Up continued after 28 February 2013 should not feed into an understanding of the meaning or content of "reasonable time".
Conduct subsequent to the contract and the time for the exercise of the right may affect a party's entitlement to rely on the right or the failure to exercise it timeously but no such conduct was pleaded in the present case to found an argument that it was inequitable for Forgacs to contend that a reasonable time had passed at the time of the purported termination or that it was estopped by its conduct from so contending.
[16]
Ballas v Theophilos (No 2)
Forgacs placed heavy reliance on the decision of the High Court in Ballas in support of its argument concerning reasonable time. Ballas concerned a partnership deed, cl 17 of which provided that "[i]f either partner shall die during the continuance of the partnership … then the surviving … partner shall have the option of purchasing the share of the deceased partner in the capital and assets of the business" on certain specified terms. These terms included that:
"the purchase price shall be the amount at which such share shall stand in the last balance sheet which shall have been prepared prior to the death of the deceased together with his share of the undrawn profits from the date of such balance sheet and together with goodwill (if any) which shall in case of dispute be valued by the manager of the bank of the firm at that time or should he be unable or unwilling to act then by any person nominated by him to effect such valuation."
The Deed did not however specify the time period within which or the time by which the option had to be exercised.
Dixon CJ said (at 197) that:
"What is a reasonable time is of course affected by the stipulations contained in the option clause itself. That means that due time must be allowed for the calculation of the amounts to be added to the share disclosed by the last balance sheet and the completion of the balance sheet to the date of death, and for the valuation of goodwill if that be required. It means too that a reasonable time must be allowed for the consideration by the surviving partner of the information thus obtained. But thereafter he must act with that promptness which is always required in the case of the exercise of an option to acquire an asset the value of which is affected by the changing conditions which time and the vicissitudes of business bring. It appears to me quite impossible to say that a period of one year and four months is reasonable." (Emphasis added)
Williams J (at 199) said:
"In the absence of any specific time, there is an implication that an option of purchase must be exercised within a reasonable time, and what is a reasonable time depends on all the circumstances of the particular case. In Collingridge v. Niesmann Harvey J., as he then was, said: - 'It is a general principle of law that an offer not otherwise limited must be accepted within a reasonable time: see Meynell v. Surtee; and Ramsgate Hotel Co. v. Montefiore. I see no reason why the same rule should not apply with equal, if not greater, force to an option for value under which one party only is bound. I, therefore, hold that the option must be read as being an option for a reasonable time only'. This case was affirmed on appeal: Niesmann v. Collingridge; see also Reid v. Moreland Timber Co. Pty. Ltd. If a specific price had been fixed by the option there could be little doubt that, having regard to its terms and to the nature of the business, this time would have been of short duration. Since no such price was fixed, and the calculation of the price required the preparation of a balance sheet of the business from the date of the last balance sheet prepared in the lifetime of the partners to the death of the partner, and the valuation of the goodwill of the business by the bank manager or his nominee, a reasonable time would have to include a sufficient period for these purposes and some short additional period to allow the surviving partner to decide whether he was prepared to pay the resultant price for the business. Admittedly the balance sheet for the period 1st July 1953 to 2nd April 1954 had been prepared early in June 1954 and after that only a short time could reasonably have been required for the plaintiff to decide whether to exercise the option or not." (Footnotes omitted; emphasis added)
Later (at 209), his Honour continued:
"The only question is whether the optionee has complied with the conditions of the option. All that the plaintiff had to do in the present case in order to exercise the option was to notify the executrix of the deceased partner within due time that he was exercising the option." (Emphasis added)
On the facts of Ballas, the deceased partner had died on 18 March 1954, and the partnership's balance sheet as referred to in the conditions to the option had been prepared in early June 1954. Williams J set out in his judgment a course of correspondence between the solicitors for the respective parties, commencing on 7 June 1954 and culminating on 28 July 1955 in a letter which was construed as the first exercise of the option (although the letter purported to "confirm" an earlier exercise).
Williams J observed (at 204) that the solicitor for the plaintiff had been under a misapprehension that the option could not be exercised until probate of the deceased party's will had been issued. In an important passage in his judgment, Williams J said (at 204):
"If there was evidence that the defendant's solicitors had agreed to extend the time to exercise the option until the issue of probate or had induced the plaintiff's solicitor to believe that they agreed that the option could not be exercised until then, it may well be that the period within which the option could have been exercised would have extended to a reasonable time after the issue of probate. But there is no evidence that the defendant's solicitors did so. The most that can be gleaned from the evidence as a whole is that the defendant's solicitors did nothing to dispel this misapprehension. They did not actively encourage it or even pretend to acquiesce in it." (Emphasis added).
The primary judge in Ballas had held that a period of six months from the date of the deceased partner's death was the longest possible period that could reasonably be allowed. Williams J, however, (at 204) was of the opinion that the plaintiff "should have been in a position to decide whether or not to exercise the option at the latest by the end of [the month in which he had received the balance sheet of the partnership]." That was a period of no more than three weeks. A close reading of Dixon CJ's judgment does not, in my opinion, indicate what his Honour would have held to be a reasonable time on the facts of the case. It was sufficient for his Honour's decision to uphold the primary judge's decision that a reasonable time had passed as at the date of the purported exercise of the option: see Ballas at 197.
[17]
Consideration
As I have already noted, the primary judge's conclusion on this aspect of the case was influenced by his conclusion that the Transition Date was 28 February 2013 and not 14 December 2012. Because I differ from his Honour on that issue, the question of reasonable time needs to be assessed from that different starting point.
There was no issue between the parties that negotiations seeking to agree Baseline True Up did continue after 28 February 2013 until shortly before the purported termination on 7 June 2013. Neither party suggested that there was any particular correspondence or conversation in that period that in terms bore on the question of whether or not a reasonable time had passed by 7 June 2013. In particular, there was no suggestion that ASC had been induced to believe that its right to terminate had been extended or that Forgacs had represented to it that it considered ASC's right to terminate was in some way preserved pending ongoing discussions seeking to reach agreement as to Baseline True Up.
ASC relied upon the evidence of Mr Cuthill in relation to the continuing negotiations. He said, at [235]-[236] of his first affidavit:
"As described in paragraphs 112, 113, 120 and 225 to 230 above, ASC put a lot of time, effort and resources into preparing for and undertaking the Baseline True Up process. I was aware, from my direct involvement in the process as set out above, that Forgacs also devoted significant time and resources (particularly in its planning, CNR and estimating team) to the Baseline True Up. Based on these observations, I believe it was still both parties' imperative as at 28 February 2013 to get the Baseline True Up done.
I am not aware, at any point after 28 February 2013 and while the Baseline True Up was continuing, of anyone at Forgacs indicating to me or anyone else at ASC that the [2HA] either:
(a) should now be terminated by ASC; or
(b) had come into force on or before 28 February 2013, notwithstanding that the Baseline True Up was not yet complete."
This material, including the course of negotiations to which it referred, did not found any argument based upon estoppel nor does it seem to me in any way to amount to conduct on the part of Forgacs which rendered it unfair for it to contend that ASC had failed to exercise its rights within a reasonable time cf. Isaacs J in Maynard (in [107] above) and Williams J in Ballas (in [114] above). ASC, it must be assumed, had its own legal advisers and it was not for Forgacs to advise it of its rights, when they should be exercised or the consequences of their failure to exercise them.
It was also common ground, despite a written submission to the contrary but which was clarified in the course of oral argument, that in none of the correspondence that passed between the parties after 28 February 2013 did ASC expressly reserve its right to terminate the 2HA pursuant to cl 4.1(a) of the 2HA by reason of Baseline True Up not having been agreed by that date.
The primary judge's observation at [120] of his judgment (reproduced at [93] above) that "it was important that the right [to terminate] be exercised promptly if it was to be exercised at all because of the hiatus arising from any delay" applies a fortiori if the Transition Date was, as I have found, 14 December 2012. That is because, it may readily be inferred, the longer the parties operated under one (new) regime, the more difficult and inconvenient it would be to revert to the former regime. As Forgacs submitted:
"… while it was true that practically the parties had been operating according to certain of the procedures under clause 2.1 of the [2HA] prior to the time when the termination right arose … what is important was that the [2HA] made important changes to the rights and obligations of the parties under the Original Contract, in particular with respect to the calculation of fee going forward. Those changes strongly suggest the right to terminate had to be exercised swiftly. That is because the longer the delay between the Transition Date and any termination of the [2HA], the longer any 'hiatus' and the more difficult it was for the parties to revert to the payment regime prescribed by the Original Contract." (Emphasis added)
Once 28 February 2013 passed without agreement as to Baseline True Up, ASC had to decide how it was going to continue moving forward: under the terms of the 2HA or under the previous regime. Although ASC had secured Forgacs' contractual promise in cl 4.1 to negotiate with a view to securing an agreement on Baseline True Up and cl 2.1(c) incentivised Forgacs to reach agreement, and although the right to terminate was unilateral, the date of the 28 February 2013 was for both parties' benefit. It signalled a fork in the commercial and contractual road ahead. Unlike Ballas, the exercise of the right to terminate the 2HA was not dependent upon the receipt by ASC of any further information required to be provided under the contract, and Forgacs' obligation to use all reasonable endeavours "to complete" the Baseline True Up had ceased some two and half months earlier: see cl 4.1(a).
In this context, although the parties continued to negotiate Baseline True Up past the Transition Date and indeed post 28 February 2013, the contractual obligation under cl 4.1(a) of the 2HA on both parties to use reasonable endeavours to complete the Baseline True Up by 14 December 2012 meant that ASC was on notice of the risk of Baseline True Up not being agreed by Forgacs for some considerable period prior to 28 February 2013. ASC had a 10 week period after 14 December 2012 to decide whether or not it would terminate on 28 February 2013. It also had this period to negotiate a standstill agreement if it anticipated needing more time. These were matters that informed the meaning of what a reasonable time was and which, in my opinion, strongly suggested that it should be very shortly after 28 February 2013.
Contrary to what the primary judge said at [121] of his judgment (see [93] above), I do not consider that it was "apparent" from the fact that ASC continued to seek to agree on Baseline True Up that ASC "was willing to give the parties more time to attempt to reach agreement before exercising its right of termination" (emphasis added). In the absence of a standstill agreement or (possibly) an express reservation of rights, ASC was at risk of losing its right of termination if it did not exercise it promptly after 28 February 2013. Continuing negotiation was consistent with ASC wishing to secure agreement on Baseline True Up; it said nothing, however, about whether or not ASC would exercise its right to terminate (assuming that the right remained alive) if no agreement were reached. As I have indicated in [46]-[71] above, the 2HA's operation was not dependent upon Baseline True Up having ever being agreed. The parties, by their contractual language, contemplated that it may operate without such agreement being reached.
Moreover, the continuance of negotiations per se could not operate as the measure of reasonableness of time because, on this logic, given the unilateral nature of ASC's right to terminate, the negotiations could carry on indefinitely without the right being required to be exercised.
A commercial party such as Forgacs, involved in a multimillion-dollar procurement contract, and having negotiated the 2HA in a manner that required, by implication, ASC's right to terminate the 2HA to be exercised within a reasonable time of that right arising if it was to be exercised, was entitled to hold ASC to that promise in the absence of conduct on its part that made it "unfair for [it] to profit by the failure of [ASC] to adhere to the requirement of the contract as to time", to use the language of Isaacs J in Maynard.
In my opinion, a "reasonable time" had long since passed when ASC purported to exercise its right to terminate. It follows that the 2HA was not validly terminated.
[18]
Was ASC's entitlement to liquidated damages under the Original Contract released by clause 6.1 of the 2HA?
ASC contends on appeal that the primary judge erred in holding that its claim for liquidated damages was released by cl 6.1 of the 2HA in circumstances where that agreement was validly terminated on 7 June 2013 and ASC's claim for liquidated damages was not made and therefore did not, on a proper construction of the 2HA and the Original Contract, "arise, accrue or exist" within the meaning of those words in cl 6.1 of the 2HA until after the 2HA was terminated.
The terms of cl 6.1 of the 2HA have already been noted: see above at [39].
ASC's argument on this ground of the Cross-Appeal only arises if the 2HA was validly terminated. For the reasons set out at [92]-[130] above, I have held that it was not validly terminated as ASC's purported termination did not occur within a reasonable time of 28 February 2013.
For completeness however I should indicate that, even if I had been of the view that the 2HA was validly terminated, I would not have acceded to ASC's argument in respect of liquidated damages.
The primary judge dealt with this issue briefly as follows:
"[135] ASC makes a claim for liquidated damages. The question is whether that claim was released by clause 6.1 of the 2HA. In my opinion, it was.
[136] ASC submits that under clause 18.1.1 of the Original Contract, the right to liquidated damages only accrued if it gave a notice to Forgacs imposing a liability to pay liquidated damages. That notice was not given until after the 2HA was terminated. Consequently, the right was not released by clause 6.1.
[137] I do not accept that submission. The release provided in clause 6.1 includes a release for "all claims … (whether actual, present, future or contingent), arising from, under or in connection with any … Liquidated Damages Amount arising under the [Original Contract] … and which arise, accrue or exist before the Effective Date". "Liquidated Damages Amount" is defined in the Original Contract to mean an amount calculated in accordance with Attachment I. That definition is picked up by the 2HA. It is not necessary to set out the details of Attachment I. It is sufficient to observe that it provides for the payment of certain amounts where Forgacs fails to achieve Acceptance by an Acceptance Date specified in respect of the delivery of Supplies.
[138] It is apparent from these provisions that the right to Liquidated Damages arises as a consequence of the late delivery of Supplies. It is common ground that the late delivery of Supplies giving rise to the claim for liquidated damages occurred before the 2HA was entered into. That was clearly a right to a Liquidated Damages Amount which had accrued before the Effective Date of the 2HA but which was contingent on ASC giving notice. It therefore fell squarely within the release. Any other interpretation of clause 6.1 would make the word "contingent" in the release redundant."
In support of Ground 4 of its Cross-Appeal, ASC submitted that the termination of the 2HA effectively cancelled the release in cl 6.1 of the 2HA, and it was asserted that "the intention of the parties was plainly that the 2HA would have no ongoing effect following such termination". ASC submitted that the primary judge did not sufficiently consider "the intention" of the words "[s]ubject to the terms of this Agreement" in cl 6.1.
The release in cl 6.1 is not expressed to be conditional upon the continued operation of the 2HA nor do I consider that that is implied. In particular, the words, "[s]ubject to the terms of this Agreement" do not, in my opinion, have that effect. Those words make it clear that the release clause does not qualify obligations contained within the 2HA.
Moreover, the release operates from the Transition Date which I have held was 14 December 2012. A consequence of ASC's argument that the release was in some sense defeasible if ASC chose, at some point several months later, to terminate the 2HA is commercially most unlikely. Senior Counsel for ASC was constrained, in order to accommodate his argument, to describe the release referred to in cl 6.1 as "suspensory". ASC's construction also sits uncomfortably with the fact that a release extinguishes a cause of action: see Caraher v Lloyd (Official Assignee) (1905) 2 CLR 480 at 501-503; [1905] HCA 18; Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574 at 608-610; [1996] HCA 38. On ASC's construction, a cause of action released "on and from the Transition Date" and thereby extinguished would be revivified by a decision of ASC to terminate the 2HA at least 2 and a half months later. In a contract where the parties, by the 2HA, were looking to achieve some clarity in their contractual relations, it would be perverse to attribute an intention to them of the kind that ASC's submissions necessarily entailed. I would have rejected this aspect of its Cross-Appeal, had it been necessary to decide it.
[19]
What was the effect of the 2HA on the calculation of Payable Fee?
Forgacs, by its fourth and fifth grounds of appeal, challenged the primary judge's finding as to the effect of the 2HA on the calculation of Payable Fee. The subject of Appeal Ground 4 is his Honour's finding that cl 2.1 operated to fix the Payable Fee at 12 percent of Payable Costs from the inception of the 2HA (namely, 26 October 2012) until the Transition Date (being, on his Honour's determination, 28 February 2013), rather than from the inception of the Original Contract until the Transition Date. The primary judge's reasoning was as follows:
"[130] Clause 2.1(a) should not be read as having a retrospective effect. Rather, it should be read as stating that the Payable Fee will be paid at a rate of 12 per cent of Payable Costs from the time the 2HA came into effect until the Transition Date. On that interpretation, the reference to "all Payable Costs" (emphasis added) is a reference to all Payable Costs incurred from the inception of the 2HA, not all Payable Costs from the inception of the Original Contract. That interpretation makes more commercial sense. It strikes me as unlikely that the parties would have intended the amount payable in respect of Payable Fees to be calculated from scratch. It also strikes me as unlikely that the parties would have intended the 2HA to have an effect on the amount payable in respect of the Payable Fee from the time the Original Contract was entered into even if the 2HA was terminated. Of course, rights already accrued under the 2HA were unaffected by the termination."
It will be recalled that cl 2.1(a) provided that:
"The parties acknowledge and agree that the following provisions set out in this clause 2 will apply on and from the Transition Date:
(a) Payable Fee on all Payable Costs incurred prior to the Transition Date will be paid at twelve percent (12%);
(b) …"
Payable Fee was defined in the Original Contract as "the amount payable as Payable Fee in accordance with clause 21.9". Payable Costs was defined as meaning the "costs to be paid under this Contract in accordance with clause 21.8.2".
Clause 21.9 provided that:
"21.9.1 The Payable Fee will be calculated in the following manner:
(a) once every Fee Payment Period;
(b) based on the EVMS calculation set out in clause 22.2;
(c) the EAC will be used to adjust the amount of Payable Fee in accordance with the Pain: Gain Regime; and
(d) if the Payable Fee exceeds the Payable Fee previously paid to [Forgacs] in the previous Fee Payment Period ASC will pay to [Forgacs] the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period. If the Payable Fee for that Fee Payment Period is less than the Payable Fee already paid to [Forgacs] by ASC, [Forgacs] will pay to ASC the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period.
21.9.2 The Payable Fee will be paid by ASC or [Forgacs], as the case may be, to the other party within 30 days of the receipt of a validate tax invoice."
"Fee Payable Period" was defined as "each consecutive period of 3 months" following the date on which the Original Contract was signed.
Forgacs submitted that the language in cl 2.1 of the 2HA that "Payable Fee on all Payable Costs incurred prior to the Transition Date will be paid at twelve percent (12%)" (emphasis added) tends against his Honour's construction. Forgacs also submitted that the primary judge's construction is inconsistent with the commercial object of the 2HA, arguing that "[t]he tenor of the admissible pre-contractual materials that were in evidence was that one of the key purposes of the [2HA] was to deal with the 'history' of the AWD Project". Pursuant to this purpose, Forgacs contended, the 2HA was designed to ensure that Forgacs received a fee which was representative of the work it had actually completed on the AWD Project (that is, including unauthorised work) from the commencement of the Original Contract to date. Forgacs submitted that, on the primary judge's construction, the 2HA would not have dealt with the "history" of the project at all.
It might also be added that, on the construction favoured by the primary judge, given the Payable Fee was only to be calculated once every quarter, and that the longest possible period between the Effective Date of the 2HA and the Transition Date was 7 weeks (the period between 26 October 2012 and 14 December 2012), it would be somewhat surprising for cl 2.1(a) to have such prominence in the 2HA. Further, as Recital C to the 2HA made clear, the 2HA was introduced to effect an amendment to the Original Contract.
In the course of oral argument, Mr Hutley SC, appearing for Forgacs, supplemented his case for this ground of appeal by reference to the release in cl 6.1 of the 2HA. He submitted that, insofar as cl 6.1 is understood to extend to the commencement of the Original Contract, so too should cl 2.1. Mr Hutley submitted that the cl 6.1 release was closing off all unresolved claims and that claims for Payable Fee under the Original Contract were necessarily unresolved claims because each payment under cl 21.9.1(d) was in essence an interim or provisional payment, providing that Payable Fee represented a quarterly fraction of the overall expected fee based on Forgacs' actual performance to date, adjusted for any over or under payment to Forgacs in the previous payment period as identified by reference to Forgacs' performance in the latest quarter.
ASC relied on the primary judge's conclusion (at [130]) that it was "unlikely that the parties would have intended the 2HA to have an effect on the amount payable in respect of the Payable Fee from the time the Original Contract was entered into even if the 2HA was terminated". ASC also supported the primary judge's finding that cl 2.1 fixed Payable Fee only from the inception of the 2HA on the basis that such a construction gives the definition "Effective Date" work to do. ASC contended that the object of the 2HA (viz. dealing with the history of the AWD Project) was effected by the release in cl 6.1, and did not necessitate the fixing of Payable Fee.
I differ, with respect, from the conclusion of the primary judge on this point. My reasons for doing so are stated in the following propositions:
1. the key words in cl 2.1(a) are not in terms temporally limited in the way the primary judge held;
2. the phrase "all Payable Costs" does not obviously suggest "all Payable Costs" within a limited period;
3. the only period to which cl 2.1(a) could apply, on the primary judge's interpretation, was an extremely limited one, and one far shorter than the quarterly payment period by reference to which the Payable Fee fell to be calculated;
4. cl 2.1(a) formed the first of a set of important provisions relating to the whole of the project, both looking backwards and forwards in point of time; and
5. contrary to ASC's submission, the Effective Date of the 2HA still had work to do on Forgacs' construction. For example the "reasonable endeavours" obligation on cl 4.1(a) would operate from that date.
I prefer and am content to rest my reasons on these textual matters rather than calling in aid the contextual and pre-contractual background matters upon which Forgacs relied. So, too, my conclusion does not draw upon the argument based on cl 6.1 which I have noted in [146] above.
The subject of Appeal Ground 5 is the primary judge's finding as to the calculation of Payable Fee following termination of the 2HA. It was not contentious that on termination of the 2HA Payable Fee was to be calculated going forward by reference to the Original Contract. What was contentious was his Honour's conclusion (at [131]) that, upon termination of the 2HA, all amounts previously paid in respect of Payable Fee (including amounts paid under the 2HA) should be accounted for in calculating the next Payable Fee.
In light of my finding that the 2HA was not validly terminated, this issue does not arise.
[20]
Costs
In view of my conclusion as to the substantive issues raised by this appeal, ASC's attack on the primary judge's decision in relation to costs falls away. Forgacs' success on this appeal means that ASC should be ordered to pay both the costs of the appeal and the costs at first instance.
[21]
Conclusion
For the foregoing reasons, I would make the following orders:
1. Appeal allowed with costs.
2. Cross-Appeal dismissed with costs.
3. Set aside the orders of the primary judge.
4. Order that ASC pay Forgacs' costs of the proceedings at first instance.
5. Direct that the parties bring in short minutes reflecting the amount due to be paid by ASC to Forgacs in light of these reasons including any interest component.
6. Liberty to apply in the event that the parties are unable to reach agreement in relation to order 5.
BASTEN JA: Subject to one matter, I agree with the reasoning and proposed orders of Bell P. That matter concerns the validity of the termination by ASC of the second Heads of Agreement dated 26 October 2012 ("the 2012 agreement"). With respect to that matter, I agree with the conclusion reached by Bell P, namely that there was no valid exercise of the power, because it was not exercised in a timely fashion. I reach that conclusion by the route set out below.
On one approach, the 2012 agreement contained an implied term requiring that the power of termination be exercised within a reasonable period. However, that restructures the question so as to remove the focus from contractual interpretation, so that the contract is relegated to the context for determining reasonableness. It may be accepted that there is no bright line between interpretation and implication; nevertheless, one effect of treating the issue of reasonable time as other than a question of contractual interpretation is to remove the focus of attention from the intention of the parties at the time of entering into the agreement, albeit an intention to be objectively ascertained.
There is another element at play. The objective approach to contractual interpretation focuses on the language used as it would have been understood by an independent observer. That tends to free the courts from the constraining influence of reflecting upon the actual intention of the parties. Nevertheless, at least where there is uncertainty, the approach acknowledges the need to understand the contractual context and the information available to the parties. [1] (It is not necessary for current purposes to decide whether that information extends to that which they could have ascertained at the time of contracting, but did not. [2] ) One important function of the approach is to preclude either party relying on uncommunicated intentions or expectations. However, there remains a fine line between construing the words used, having regard to the context in which the contract was formulated, and using pre-contractual negotiations to construe the language.
A practical function of the objective approach is to control the factual disputes which could arise if contract cases required resolution of factual disputes as to pre-contractual negotiations, let alone post-contractual conduct. [3] However, such a pragmatic consideration of dispute resolution cannot give rise to an inflexible rule of interpretation.
If the question of the validity of the termination does not turn upon contractual interpretation, it may be open to the court to have regard to post-contractual events and the conduct of the parties. This approach was adopted by the primary judge, who, having concluded that the right of termination was to be exercised within a reasonable time, continued: [4]
"[116] What constitutes a reasonable time is a question of fact which will depend on the context in which the right arises and the circumstances of each particular case: see Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 at 26 per Dixon CJ, McTiernan, Fullagar and Kitto JJ. As Brennan J said in Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, '[i]ts limit is determined by reference to what is fair to both parties' at the time of the exercise of the right: at 567-8; [1982] HCA 29; see also K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2012] NSWCA 117 at [48] per Meagher JA (with whom Macfarlan JA and Tobias AJA agreed), citing Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 at 444 per McHugh JA (with whom Priestley JA agreed)."
In applying that principle, the judge set out his reasoning in the following terms:
"[120] The question, then, is whether ASC exercised the right within a reasonable time. I have concluded that it did. The context in which the right arose suggested that it was important that the right be exercised promptly if it was to be exercised at all because of the hiatus arising from any delay. However, it is relevant that the parties had already been operating under that hiatus for a substantial period of time. Many of the things contemplated by clause 2.1 of the 2HA had already been put into place before the Transition Date and before the right of termination had arisen. Consequently, this was not a case where the occurrence of the Transition Date brought or was expected to bring about major changes to the way that the parties operated at a practical level, with the result that it was important for them to know promptly whether those changes needed to be made. Rather, the principal effect of the occurrence of the Transition Date was to give contractual force to the way in which the parties were already operating.
[121] Nothing of substance changed in the way the parties operated after 28 February 2013. In particular, ASC did not insist on any of its rights under the 2HA but instead continued with the negotiations of Baseline True Up. It must have been apparent to Forgacs from those matters that ASC wanted Baseline True Up to be agreed and it was willing to give the parties more time to attempt to reach agreement before exercising its right of termination. It is not suggested that ASC failed to carry out those negotiations diligently or that it should have appreciated earlier on that further negotiations were futile. Nor is it suggested that Forgacs was prejudiced by the delay. In those circumstances, in my opinion, it was reasonable for ASC to have waited until 7 June 2013 before terminating the 2HA."
Subject to placing a different emphasis upon the extent to which it was important for the parties to know promptly whether the provisions engaged at the Transition Date were to continue to operate or not, what was said in [120] was an acceptable process of reasoning. The second step, at [121], was to have regard to the conduct, together with questions of diligence and prejudice, between the Transition Date and the date when notice of termination was given. In my view, the latter part of the reasoning was neither supported by the authorities referred to at [116], nor otherwise a correct approach.
The authorities referred to concern a range of circumstances. Cavallari v Premier Refrigeration [5] was concerned with a single question, namely whether a contract for the sale of land had been made, in circumstances where the vendor had stated in a letter that he would "require a period of not less than six months" to enable him to move his business and plant. The Court held that the words were stipulatory and, when accepted by the respondent purchaser, as requiring that vacant possession was to be given after the expiration of six months, resulted in a contract with a term to that effect. Apart from the language of the two letters, the only factual matter relied upon was the knowledge of both parties that the vendor was carrying on business in the premises at the time of the agreement to sell.
Perri v Coolangatta Investments [6] was another agreement to sell real estate, in this case subject to a special condition that the contract was subject to the purchasers completing a sale of their existing property. The trial judge, Needham J, had held that the contract was subject to completion of the condition within a reasonable time, which had passed without the sale being completed. Gibbs CJ accepted that a reasonable time for fulfilment of the special condition had expired and that it was open to the vendor to terminate the contract without giving notice. Wilson J accepted that such a period had elapsed, stating: [7]
"It is immaterial to seek for an explanation for the non-fulfilment of the condition, but no doubt it lies in the finding of the learned trial judge that the appellants did not make reasonable efforts to effect a sale. Putting oneself in the shoes of the parties as they negotiated their agreement in March, it seems to me that a period of four months would have been the very most that the appellants could have persuaded the vendor to accept."
The other members of the majority (Mason J dissenting) were Brennan J, with whom Stephen J agreed. Brennan J stated that "[w]hat is a reasonable time is a question of fact and depends upon the circumstances. Its limit is determined by reference to what is fair to both parties." [8] He did not say that the assessment was to be made "at the time of the exercise of the right", being the additional words of the trial judge at [116] set out above. Brennan J did, however, refer to the reasoning of Needham J, noting that the purchasers' property had features which were more attractive in summer than during the winter months. Although Needham J had found that the price sought by the purchasers in selling their own property had been unreasonably high, accounting for the delay, Brennan J stated: [9]
"As to the unfavourable winter market, the vendor could not reasonably have been expected to allow the winter months to pass in order that the purchasers could have the benefit of the more favourable sale prospects of the ensuing summer."
The last statement appeared to reflect circumstances known to both parties at the date of entering into the contract.
It is true that in Crawford Fitting Co v Sydney Valve & Fittings [10] this Court held that an indefinite contract was subject to an implied power to terminate, which could occur at any time on reasonable notice, reasonableness being judged in the light of the circumstances at the time of giving notice. [11] However, the present case was not one involving one party giving notice to the other, so that the other could have a reasonable opportunity to wind down its business and take steps to address the effects of the termination; nor was it one involving an indeterminate contract, with a power to give notice. Rather it involved a contract terminable on the occurrence (or non-occurrence) of a specified event at a specified time without any requirement to give advance notice conferring benefits on the other party.
In the present circumstances, there may be three possibilities for the stage at which to consider the reasonable time within which it was open to ASC to terminate the 2012 agreement, namely (i) when the 2012 agreement was executed; (ii) when the power to terminate arose, and (iii) when notice of termination was given. On one view, the least plausible of these is the third, which depends on an ex post facto analysis by the court as to whether or not a reasonable time expired before the notice was given. Such an approach appears to be destructive of an assumption that the terms of a contract must be reasonably capable of ascertainment at the time they are agreed. Such a level of indeterminacy, if avoidable, should be avoided. Yet both parties submitted that the reasonableness of the period was indeed a matter to be determined at the date the notice of termination, effective immediately, was given.
The appellant, however, also relied upon the reasoning of the High Court in Ballas v Theophilos [No 2], [12] a case involving an option under a partnership agreement for a milk bar business allowing a surviving partner to purchase the interest in the partnership of the deceased partner. The purchase price was identified as the value of the share in the last balance sheet prepared prior to death of the deceased, together with his share of the undrawn profits from the date of the last balance sheet to the date of death, together with his share of the goodwill of the business, which might need to be valued. The option provided that the amount representing the share of profits "shall be paid immediately on the completion of a balance sheet to the date of dissolution". Dixon CJ stated: [13]
"The partnership deed limits no time for the exercise of the option. The implication of law is that it must be exercised within a reasonable time. What is a reasonable time is of course affected by the stipulations contained in the option clause itself. That means that due time must be allowed for the calculation of the amounts to be added to the share disclosed by the last balance sheet and the completion of the balance sheet to the date of death, and for the valuation of goodwill if that be required. It means too that a reasonable time must be allowed for the consideration by the surviving partner of the information thus obtained. But thereafter he must act with that promptness which is always required in the case of the exercise of an option to acquire an asset the value of which is affected by the changing conditions which time and the vicissitudes of business bring."
Although Dixon CJ took account of the correspondence between the solicitors for the deceased's wife and the surviving partner over the period of 16 months before the option was accepted as having been exercised, his purpose was to determine whether the earlier correspondence constituted an exercise of the option.
Looking at the terms of the contract, there were a number of factors in the present case which were relevant to determining what constituted a reasonable time for exercising the right of termination under cl 4.1(a).
First, there was the structure of the 2012 agreement. The agreement was executed on 26 October 2012. Clause 2.1 provided a regime for both calculation of amounts payable by ASC and the process by which the scope of the required work would be identified by ASC, a budget prepared by Forgacs and authorisation given. These variations of the original contract were to operate from the Transition Date: cl 2.1. Transition Date was defined to mean "the earlier of the date set out in cl 4.1(a) or [and?] the date upon which ASC approves the Baseline True Up": cl 1.1. Clause 4.1(a) involved an acknowledgment and agreement by the parties:
"(a) to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 provided that if the Baseline True Up is not agreed by 28 February [2013] ASC may terminate this Agreement by providing written notice to that effect …."
The first step is to identify of which two dates the Transition Date was the earlier. Bell P concludes above that the possible dates are (i) that on which Baseline True Up was agreed and (ii) 14 December 2012. I agree that is so, and with his reasoning, but would add the following observations. There is an element of ambiguity in the definition of "Transition Date" which arises from the fact that cl 4.1(a) contained two dates, namely 14 December 2012 and 28 February 2013. The definition of Transition Date assumed that only one date was set out in cl 4.1(a). One reason for thinking that the date to which reference was made in the definition of Transition Date was 14 December 2012, is because that date is the primary reference point in par (a), the purpose of which is to acknowledge and agree to an obligation that the parties use all reasonable endeavours to complete the Baseline True Up by that date. The later date was included by way of recognition that Baseline True Up might not be agreed by the target date. It is unlikely that the definition of Transition Date was intended to pick up a date which might have no operation, and was included for a subsidiary purpose, namely to identify when a power to terminate might arise, thus allowing the agreement to immediately cease to operate.
Turning to the structure of the regime, there are four points to note. First, the parties envisaged the possibility that Baseline True Up might be agreed prior to 14 December 2012. If so agreed, that would be the Transition Date. There was a period of some six weeks between the execution of the 2012 agreement and 14 December 2012 when that might have occurred.
Secondly, the language of cl 4.1(a) required "use of all reasonable endeavours", thereby recognising that the Baseline True Up might not be completed even by 14 December 2012. In that event, although the important obligations under the 2012 agreement would operate for a period, ASC reserved to itself the power to terminate the new arrangements if Baseline True Up had not been agreed some 10 weeks later (no doubt making some allowance for the Christmas and New Year holiday period). The inference to be drawn from these time periods is that ASC would only commit itself to the new regime, varying the original contract, if the baseline from which various scheduling calculations and payment calculations were to be made were agreed no later than 28 February 2013. During that period there would be an element of uncertainty as to the contractual arrangements between the parties, but only ASC had contractual power to terminate the uncertainty.
Thirdly, while the option to terminate may have involved an exercise of discretionary power on the part of ASC, it did not involve any circumstance involving investigation or uncertainty as to the engagement of the power. Indeed, the precondition to the engagement of the power, namely agreement to the Baseline True Up, lay in the hands of ASC itself. It did not need time to make inquiries or to obtain further information. If, there having been ongoing negotiations using all reasonable endeavours since 26 October 2012, Baseline True Up had not occurred, there was nothing in the contractual terms to warrant delay by ASC in exercising its power, once engaged, if minded to do so.
Fourthly, the appellant submitted that if, as the trial judge reasoned, to avoid any significant hiatus between the Transition Date and a failure to agree as to Baseline True Up, the relevant date in cl 4.1(a) was 28 February 2013, that would be a further powerful reason to conclude that a reasonable time for termination must be promptly after that date arrived without agreement. That is, on either view of the definition of Transition Date, a reasonable time to exercise the power once engaged required prompt notice.
The evidence indicated that entry into the 20112 agreement required board approval within ASC. The general manager of shipbuilding at ASC, James Cuthill, stated that the decision to terminate the second Heads of Agreement was made by the AWD Alliance. [14] The AWD Alliance was an arrangement entered into between the Commonwealth of Australia, Raytheon Australia Pty Ltd and ASC to design and construct three air warfare destroyers. This Court was not taken to evidence as to how the AWD Alliance operated. However, on the basis that the 2012 agreement was entered into one month after it was approved at a board meeting of the AWD Alliance project on 26 September 2012, it may be inferred that a period of between three and six weeks may have been required in order to make a decision to terminate the 2012 agreement. On that basis, a decision taken on or shortly after 28 February 2013 should have been approved and conveyed to Forgacs no later than the end of April 2013.
For these reasons, I agree with Bell P that the power vested in ASC pursuant to cl 4.1(a) to terminate within a reasonable time of the engagement of that power was not satisfied by termination on 7 June 2013.
EMMETT AJA:
[22]
Introduction
This appeal is concerned with a contract entered into between the respondent, ASC AWD Shipbuilders Pty Ltd (ASC), and the appellant, then known as Forgacs Engineering Pty Ltd (Forgacs), on 20 August 2009 (the Original Contract). The Original Contract was entered into by ASC to enable ASC to perform certain of its obligations to the Commonwealth of Australia (the Commonwealth) under an alliance-based target incentive agreement (the Principal Contract) entered into between the Commonwealth and ASC on 3 October 2007. Under the Principal Contract, ASC agreed to provide various services to the Commonwealth in relation to the construction for the Royal Australian Navy of three air warfare destroyers (the Ships).
Following the entry into of the Original Contract, Forgacs and ASC entered into several further agreements in relation to the services and work to be provided by Forgacs to ASC. In particular, ASC and Forgacs entered into an instrument described as "Heads of Agreement" and dated 26 October 2012 (the second HOA). By the second HOA, ASC and Forgacs varied the terms on which Forgacs was to be paid for the work that it was required to perform under the Original Contract. The question in dispute in the appeal is whether Forgacs is entitled to be paid in accordance with the second HOA. In order to explain issues that have arisen in relation to the construction of the second HOA it is necessary to describe the Original Contract in more detail.
[23]
The Original Contract
The Ships were designed by Navantia SA, a company based in Spain, under a separate contract between Navantia SA and the Commonwealth. Under the Principal Contract, the construction of each of the Ships was broken into 31 parts known as "Blocks". The Original Contract provided for the construction of certain Blocks for each of the Ships. The pivotal obligation of Forgacs under the Original Contract was provided for in cl 6.1, which provided that Forgacs must, for the payments specified in the Original Contract, provide the Supplies in accordance with the Original Contract and perform its other obligations under the Original Contract. Under cl 7.1, the scope of Supplies was generically set out in Attachment A to the Original Contract. The specific scope of the Supplies was to be set out in each purchase order issued by ASC under or in relation to the Original Contract (Purchase Order). Clause 21.6 set out the details that were required to be contained in each Purchase Order.
By cl 7.2.1 of the Original Contract, ASC was required to issue Block Data Packs to Forgacs from time to time. A Block Data Pack was defined as the package of technical documents issued to Forgacs from time to time defining the design, configuration and standards of a Block. On or before the relevant Block Work Pack Delivery Date, ASC was required to deliver all of a Block Data Pack necessary to complete the scope of work set out in a Block Work Pack, which was defined as the package of instructions and directions issued to Forgacs in accordance with cl 7, detailing work to be completed by Forgacs in respect of a particular Block. , However, ASC was entitled to make early deliveries of a Block Data Pack at any time.
Under cl 7.3.1, ASC was required to issue the Block Work Packs at the times specified in attachment E to the Original Contract. Clause 7.3.4 relevantly provided that, within 20 working days of receipt of the Block Work Pack, Forgacs was to provide ASC with an estimate to complete the work in the Block Work Pack (the Estimate), based on the rates and metrics set out in attachment C. The Estimate was required to include sufficient detail to allow ASC to consider the Estimate against the rates and metrics in attachment C. The Estimate was to constitute an offer by Forgacs to ASC.
Clause 21.2.1 provided that each Estimate under cl 7 was to comprise the following:
Labour Cost Estimate;
Production Variable Overhead Estimate;
Other Direct Costs (ODCs), if any; and
Target Fee.
The term ODCs was defined as any direct costs attributable to a Block Work Pack to which labour rates and product rates could not be reasonably applied. Target Fee was to be calculated under cl 21.2.2(e) by applying the Target Fee Percentage to the aggregate of Labour Cost Estimate, Production Variable Overhead Estimate and ODCs. Item C10 of Attachment C provided that the Target Fee Percentage was to be 19%.
Under cl 7.3.5, if ASC accepted the Estimate, ASC was required to issue to Forgacs a Purchase Order for a Block or revise a Purchase Order for additional Block Work Packs for which a Purchase Order had previously been issued. ASC was required to do so within 20 working days of the receipt of the Estimate. Under cl 7.3.7, if ASC did not issue a Purchase Order in accordance with cl 7.3.5, ASC was entitled to issue a Purchase Order in respect of the Block Work Pack on the basis of ASC's own estimate in accordance with attachment C. Forgacs was required to commence work in accordance with such a Purchase Order.
ASC and Forgacs were required to work together expediently and in good faith either to agree on a Purchase Order or a Contract Amendment Proposal (CAP). Provision was made for either party to refer a matter to the Independent Expert for determination if the parties could not agree on a Purchase Order. The determination of the Independent Expert was to be binding on the parties and was not capable of further dispute.
Clause 7.5 relevantly provided that, once a Purchase Order was issued by ASC under cl 7.3, Forgacs was required to provide to ASC the Supplies described in the Purchase Order and to meet all other requirements set out in the Purchase Order and the Original Contract. Forgacs was also required to have achieved a Supplies Acceptance Certificate from ASC by the dates specified in attachment E, and was required to meet the dates set out in attachment E upon which the relevant Supplies were to be delivered to the dock situated at Tomago Shipyard, New South Wales. Under cl 7.6.3, no Supplies were to be provided without a Purchase Order.
Clause 21 of the Original Contract dealt with "Price and Payment Basis". Clause 21.1.1 provided that the Original Contract had one Target Cost Estimate, which was comprised of numerous smaller target cost estimates, which were to be added together over the period of the Original Contract to form the overall Target Cost Estimate (TCE). Forgacs was to be paid Payable Costs for the work performed under the Original Contract. Payable Costs were to be the actual hours of work at the rates contained in the Original Contract and other costs as detailed in Part 4 of the Original Contract.
Under cl 21.1.3, the Payable Costs were to be compared against the Target Cost Estimate and ASC and Forgacs were to share in any over run or under run until Forgacs' Target Fee had been eroded to zero. If Forgacs' Target Fee was eroded to zero, Forgacs was required to complete all work under the Original Contract at Forgacs' own cost. Forgacs' Target Fee at any time was the accumulated total Target Fee amounts specified in all Purchase Orders then issued by ASC. The Target Fee was to represent Forgacs' aim for profit payable under the Original Contract.
Clause 21.7 of the Original Contract relevantly provided that, at any point in time, the Target Cost Estimate was to be the accumulated value of all amounts of each Target Cost Estimate identified in each Purchase Order then issued by ASC. The Target Fee at any point in time was to be the accumulated value of all amounts of each Target Fee identified in each Purchase Order then issued by ASC.
payable labour costs;
payable production variable overheads;
payable fixed overheads;
payable project management costs; and
ODCs.
Clause 22.2.7 specified a process to be used to determine Target Fee Payments. First, the earned value in base AUD values was to be calculated. The CPI from the EVMS was to be calculated. The estimate at completion (EAC) for the fee payment period based on the Budget at Completion (BAC) and CPI values from the EVMS was then to be derived.
Clause 21.9 provided for the calculation of the Payable Fee once every three months. The Payable Fee was to be based on the EVMS calculation set out in cl 22.2. The EAC was to be used to adjust the amount of Payable Fee in accordance with the Pain:Gain Regime set out in cl 21.10. If the EAC exceeded the TCE, the Payable Fee was to be reduced by $0.50 in every dollar that the EAC exceeded the TCE. If the EAC was lower than the TCE, the Payable Fee was to be increased by $0.50 in every dollar that the EAC was under the TCE. The amount of the Payable Fee was to be a maximum of double Forgacs' Target Fee. If at any time Forgacs was not entitled to any Payable Fee, ASC was to cease paying Payable Costs and Forgacs was to undertake any work under the Original Contract at the sole cost of Forgacs.
Clause 21.9.1 provided that, if the Payable Fee exceeded the Payable Fee previously paid to Forgacs in the previous period of three months, ASC would pay to Forgacs the difference between the Payable Fee already paid and the Payable Fee for that period of three months. If the Payable Fee for that period was less than the Payable Fee already paid to Forgacs by ASC, Forgacs was required to pay to ASC the difference between the Payable Fee already paid and the Payable Fee for that period. The Payable Fee was to be paid by ASC or Forgacs, as the case may be, within 30 days of the receipt of a valid tax invoice.
Clause 22 of the Original Contract dealt with "Payment Claims". Under cl 22.1.1, Forgacs was authorised to submit a claim for payment at the end of each month to be accompanied by EVMS reports, a valid tax invoice and any other relevant documentation necessary to establish that the claim was in accordance with the Original Contract. On receipt of a claim for payment, ASC was required either to approve the claim or, within 10 working days, reject the claim. If ASC approved the claim, ASC was required to pay the amount of the approved claim to Forgacs 30 days from the date of the approved claim.
Clause 51 of the Original Contract provided an amendment procedure. Clause 51.1.1 relevantly provided that, except as expressly permitted in the Original Contract, the Original Contract might be amended only in accordance with cl 51 and ASC was not to be liable to Forgacs for any additional work undertaken or expenditure incurred by it unless the amendment was made in accordance with cl 51. Under cl 51.1.2, if ASC proposed an amendment, or Forgacs proposed an amendment, to the Original Contract and ASC notified Forgacs that it agreed to consider the proposed amendment, or the parties agreed that an amendment would be made, Forgacs was required as soon as practicable to prepare and submit to ASC a CAP to give effect to such amendment. Under cl 51.2.1, ASC was required to evaluate a CAP submitted by Forgacs and, within 25 working days after receipt, either agree to the CAP or reject the CAP, giving reasons for such objections.
[24]
The Second HOA
The second HOA is not an instrument in which its authors should take any pride. It is difficult to construe and its drafting gives rise to the substantial dispute in these proceedings.
By the second HOA, the parties recited that:
the Commonwealth was undertaking the procurement of the Ships;
ASC had subcontracted certain work to Forgacs under the Original Contract and Forgacs' obligations included the provision of Supplies which included the fabrication of certain Blocks; and
in furtherance of promoting cost and performance efficiencies, ASC and Forgacs had agreed to amend the Original Contract in accordance with the second HOA.
By cl 2.1 of the second HOA, the parties acknowledged and agreed that certain provisions, as set out in that clause, were to apply on and from the Transition Date. The first question raised in the appeal is the meaning of the term "the Transition Date", which is defined in cl 1.1 as:
The earlier of the date set out in clause 4.1(a) or the date upon which ASC approves the Baseline True Up.
Baseline True Up was defined in cl 1.1 as:
ASC's Review and Approval of the production baseline, EVMS, Configuration Status Accounting Report (CSAR) and Schedule Baseline for each Block to apply from the Transition Date.
Schedule Baseline was defined in cl 1.1 as:
The schedule setting out at least the Shipping Dates for each Block that will apply from the Transition Date.
The provisions set out in cl 2 were as follows:
(a) Payable Fee on all Payable Costs incurred prior to the Transition Date will be paid at twelve percent (12%);
(b) the TCE process set out in clause 7.3 of the [Original Contract] will cease to operate and:
(i) ASC will provide Block Work Packs that define work scope;
(ii) Forgacs will provide a budget based on its work orders rolled up to Block Work Pack level for the issued work scope (Budget);
(iii) as soon as reasonably practicable after receipt of the Budget ASC will provide a written work authorisation;
(iv) Forgacs will only carry out and ASC will only be liable for work authorised by ASC by a written work authorisation;
(v) the labour rates and ODCs set out in Attachment C of the Subcontract will continue to apply to work conducted under a work authorisation;
(vi) all Payable Costs except Fixed Overhead will attract a margin of eight and a half percent (8.5%); and
(vii) Fixed Overhead will attract a margin of twelve percent (12%) paid monthly in arrears (Base Fee);
(c) all Payable Costs except Fixed Overhead, will be subject to a performance based margin (Incentive Fee) which will:
(i) comprise of schedule based incentives calculated in accordance with Attachment A capped at one percent (1%) of Payable Costs incurred in the preceding month;
(ii) comprise of performance based incentives calculated in accordance with Attachment A capped at four and a half percent (4.5%) of Payable Costs incurred in the preceding three months;
(iii) be assessed on each individual month or quarter respectively, and not on a cumulative basis; and
(iv) be subject to review (including applicable scope and targets) three (3) months after the Transition Date and six (6) monthly thereafter.
(d) the Depreciation Charge remains unchanged and will not be subject to any Payable Fee or other margin;
(e) the [Original Contract] Liquidated Damages regime will cease to apply;
(f) ASC personnel will be integrated into the Forgacs project management decision process through involvement in Forgacs' internal production meetings and schedule discussions, and any amendments to Project Management structure or personnel numbers must be Approved by ASC;
(g) the EVMS will be retained and maintained but will not determine Payable Fee;
(h) Forgacs will store ASC steel plate relating to the [Ships] at no cost;
(i) Forgacs will be provided with an opportunity within a discrete period at its cost to assess and elect to conduct repairs to any Defect or Latent Defect arising during the Warranty Period or Latent Defect Period respectively; and
(j) all other rights and obligations will continue in force.
Clause 4 of the second HOA dealt with "scope and schedule" and was in the following terms:
4. SCOPE AND SCHEDULE
The parties acknowledge and agree that:
4.1 Baseline
(a) to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 provided that if the Baseline True Up is not agreed by 28 February 2013, ASC may terminate this Agreement by providing written notice to that effect whereupon the parties shall have no further rights, claims or obligations with respect to the subject matter of this Agreement;
(b) the Schedule Baseline will apply from the Transition Date and will be maintained and updated monthly by Forgacs;
(c) upon Approval by ASC the Schedule Baseline will replace Attachment E of the [Original Contract]; and
(d) all proposed amendments to the Schedule Baseline must … be Approved by ASC prior to implementation… .
(e) Forgacs will deliver a CSAR and VARs (Variance Analysis Report) report for each Block on a monthly basis for Approval by ASC.
4.2 Work Scope Changes
(a) ASC will not issue any new or additional work scope (including CNRs (Change Notification Requests)) within sixteen (16) weeks of a Block's Shipping Date;
(b) Forgacs will not commence the assessment of any CNR's within eight (8) weeks of a Block's Shipping Date;
(c) except for defect rectification activities, Forgacs will not implement any additional work scope within four (4) weeks of a Block's Shipping Date; and
(d) Acceptance will be based upon the work completed by the Shipping Date and clause 43 of the [Original Contract] will not apply.
Clause 6 of the second HOA is concerned with "other rights and obligations". Clause 6.1 contains a release in the following terms:
6.1 Release
Subject to the terms of this Agreement, on and from the Transition Date each party releases each other party and their employees, directors, servants, agents, assigns and any related bodies corporate (as defined in the Corporations Act 2001) (Related Persons) from (i) all costs, expenses, losses, damages and liability (including legal costs) suffered, incurred or owing by the respective parties, and their Related Persons, and (ii) all claims, actions and proceedings (whether actual, present, future or contingent) arising from, under or in connection with any Extension of Time, TCE (Target Cost Estimate) Adjustment Event or Liquidated Damages Amount arising under the Subcontract (whether in contract, tort or otherwise) and which arise, accrue or exist before the Effective Date. [15]
Clause 6.4 is in the following terms:
6.4 Preservation of Rights
The parties agree that subject to the express terms of this Agreement:
(a) the respective rights and obligations of each party under the [Original Contract]and at law existing as at the Effective Date of this Agreement are expressly preserved; and
(b) any action or inaction by a party under or in relation to this Agreement, does not operate as a waiver, variation, release or discharge of any rights, powers or remedies of ASC or Forgacs under the [Original Contract], and those rights, powers or remedies remain and continue in full force and effect, other than expressly set out in this Agreement.
Clause 8 provides that the second HOA was to be governed by the law in force in New South Wales and that each party must pay its own expenses incurred in negotiating, executing, stamping and registering the second HOA. Clause 8.3 provides that each party must take all reasonable action to give full effect to the second HOA. That provision is to be contrasted with the obligation imposed on the parties, by cl 4.1(a), to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012.
[25]
Questions in the Appeal
Forgacs, now known as Donau Pty Limited, [16] commenced proceedings in the Technology and Construction List of the Equity Division seeking a determination of several questions as to the construction of the second HOA. On 20 August 2018, a judge of the Equity Division (the primary judge) published his reasons for the conclusions reached on various questions. On 4 October 2018, the primary judge made orders to the effect of the following:
1. Forgacs' claims be dismissed;
2. Declare that ASC is entitled pursuant to cl 21.9 of the Original Contract to the following sums:
1. $25,603,700.10 in respect of the Payable Fee Claim; and
2. $4,600,528.71 in respect of the Additional Payable Fee Claim.
1. Forgacs pay to ASC the sums of:
1. $2,185,132.59 in respect of the balance of the Payable Fee Claim; and
2. $4,600,528.71 in respect of the Additional Payable Fee Claim.
1. Forgacs pay interest to ASC in the amounts of:
1. $312,526.14 in respect of the balance of the Payable Fee Claim; and
2. $465,291.19 in respect of the Additional Payable Fee Claim;
1. The other claims made by ASC in its further amended cross-summons be dismissed.
The parties agree that the primary issues in the appeal, as raised by Forgacs' notice of appeal filed on 9 October 2018 and ASC's amended notice of cross-appeal filed on 14 November 2018, are as follows:
1. Whether the Transition Date, as defined in the second HOA, occurred. The primary judge concluded that it did.
2. If the Transition date occurred, whether it occurred on 14 December 2012 or 28 February 2013. The primary judge concluded that the Transition Date was 28 February 2013.
3. If the Transition Date occurred, whether ASC validly exercised its right to terminate the second HOA on 7 June 2013 or whether ASC either:
1. elected to affirm the second HOA; or
2. did not terminate the second HOA within a reasonable time.
The primary judge concluded that ASC did not elect to affirm the second HOA and validly terminated it, within a reasonable time, on 7 June 2013.
1. If the Transition Date occurred and ASC's termination of the second HOA on 7 June 2013 was valid, what was the effect, on the Original Contract, of the period during which the second HOA was in force in respect of:
1. the liquidated damages release in the second HOA; and
2. the regime for the calculation of the fee payable to Forgacs.
The primary judge concluded that the coming into effect and subsequent termination of the second HOA had the effect that: [17]
1. the payment of the Payable Fee pursuant to the Original Contract was not varied by the second HOA; and
2. ASC's claim for liquidated damages was released by the second HOA.
[26]
The Transition Date
The first question for determination is whether the Transition Date could ever occur before the Baseline True Up was agreed by the parties or approved by ASC. ASC's primary contention is that the intent of the second HOA was that its operation was conditional upon that event, such that the operative provisions set out in it never operated. ASC contends that the question of whether the regime envisaged by the second HOA would ultimately take effect was subject to the precondition that the Baseline True Up would be agreed or approved by ASC. It is common ground that the Baseline True Up was never agreed or approved by ASC.
The syntax of cl 4.1(a) is garbled. The first part of cl 4.1(a) reads as follows:
The parties acknowledge and agree that … (a) to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 ...;
The word 'that" is clearly otiose in relation to par (a). That might suggest that cl 4.1(a) was a later insertion. However, there was no direct evidence about the circumstances of the drafting of the second HOA. Further, while the words "provided that" and the words following that phrase in cl 4.1(a) are expressed as a proviso, that part constitutes a separate and independent provision conferring a conditional right to terminate on ASC. It is not, in truth, a qualification of the obligation imposed by the first part, in the way that a provision commencing with "provided that" would operate. That might suggest that the "proviso" was an addition to cl 2.1(a). However, as I have said, there was no evidence to suggest that, when the definition of "Transition Date" was drafted, there was only one date set out in cl 4.1(a).
The reference, in the definition of Transition Date, to "the date set out in cl 4.1(a)" is confusing in circumstances where there are in fact two dates set out in cl 4.1(a). Be that as it may, the reference to "the date set out in cl 4.1(a)" more logically refers to the date set out in the primary operative part of the clause rather than in that part of the clause that is expressed as a proviso. That is to say, the text suggests that the parties intended that "the date set out in cl 4.1(a)" was 14 December 2012.
The second HOA is dated 26 October 2012. The operative part of cl 4.1(a) required the parties "to use all reasonable endeavours to complete" the Baseline True Up by 14 December 2012. That is to say, each of ASC and Forgacs was required to use its reasonable endeavours to ensure that the Transition Date was no later than 14 December 2012. Nevertheless, the parties contemplated that the Transition Date might be later than 14 December 2012, otherwise the use of the phrase "the earlier of" in the definition of Transition date would be otiose. Clearly enough, the parties contemplated that they might continue to endeavour to agree upon a Baseline True Up, even after 14 December 2012 had passed.
Clause 8.3 of the second HOA also imposed an obligation on both ASC and Forgacs to continue to take all reasonable action to give full effect to the second HOA. ASC was given the right to bring that obligation to an end. However, if it did not, the obligation to continue to take reasonable action remained on foot. A significant purpose for continuing to take reasonable action to give full effect to the second HOA was to complete the Baseline True Up and have it agreed to by the parties or approved by ASC.
Thus, the second HOA was not to have effect until the Baseline True Up was "agreed", as the so-called proviso would have it, or "approved", as the definition of Transition Date would have it. Since proposals for Baseline True Up were to come from Forgacs and were to be accepted by ASC, the parties probably intended no difference between Baseline True Up being "agreed" and Baseline True Up being "approved" by ASC. It was clear that the Baseline True Up was fundamental to the new provisions that were to apply from the Transition Date. The entire bargain recorded in the second HOA was predicated upon the Baseline True Up being agreed or approved by ASC. That is demonstrated by several provisions of the second HOA that assumed or required that the Baseline True Up be agreed or approved.
Thus, cl 2.1(g) relevantly provided, in effect, as follows:
The parties acknowledge and agree that … on and from the Transition Date … the EVMS will be retained and maintained but will not determine Payable Fee.
The EVMS was one of the elements required to be approved as part of the Baseline True Up as defined in cl 1.1. The obligation to retain and maintain the EVMS indicates that, when the obligation arose, the EVMS would already have been approved as part of the Baseline True Up. There would be no point in Forgacs being required to maintain the out of date and dysfunctional EVMS unless the second HOA had come into operation. It follows that cl 2.1(g) was not intended to create any obligation for Forgacs until the Baseline True Up had been agreed or approved.
By cl 4.1(b), the parties acknowledged and agreed that the Schedule Baseline would apply from the Transition Date and would be maintained and updated monthly by Forgacs. The Schedule Baseline was defined in cl 1.1 as the schedule setting out at least the Shipping Dates for each Block that were to apply from the Transition Date. The Schedule Baseline was the fourth element in the Baseline True Up, in addition to the production baseline, the EVMS and CSAR. The primary judge accepted that ASC and Forgacs from time to time agreed on operational dates for the shipment of the Blocks. [18] However, given the evidence that the Schedule Baseline was critical to the project, ad hoc agreement on shipping dates could not be what the parties contemplated when referring to the Schedule Baseline in the second HOA. There was no benefit to the parties in varying the Original Contract on the basis that all that was required was ad hoc agreement about when particular Blocks would be shipped. The use of the defined term "Schedule Baseline" in cl 4.1 indicates that the parties presupposed that the Baseline True Up had been approved or agreed by the time that the second HOA was to come into force.
Both cl 4.1(c) and cl 4.1(d) are also reliant on an approved Schedule Baseline. Without the Baseline True Up, there would be no sense in the parties wishing to refer to an out-dated and unworkable schedule. In addition, cl 4.2 is reliant, for its operation, on Shipping Dates, which form part of the Schedule Baseline. The primary judge considered that the Shipping Dates could be agreed ad hoc. [19] However, that is not the intent of an agreement centred on resetting the entire Baseline of the project to enshrine a complete and stable schedule.
By cl 5.1 of the second HOA, the parties acknowledged and agreed that a CAP ought to be executed as soon as reasonably practical after agreeing the Baseline True Up. It would be curious for the parties to contemplate that the operative provisions of the second HOA would come into effect regardless of whether the Baseline True Up was approved, but the formalisation of the arrangements was to be effected with a CAP only if the Baseline True Up was approved. I consider that to be an indication that Baseline True Up was a pre-requisite for the substantive operation of the second HOA.
I consider that it follows from the fact that the Baseline True Up was never agreed or approved that the Transition Date did not occur. Accordingly, the provisions set out in cl 2.1 of the second HOA did not come into operation. It also follows that the release contemplated by cl 6.1 did not come into effect.
[27]
The Remaining Questions
I have had the advantage of reading in draft form the President's reasons for reaching his conclusions. In reaching the above conclusions, I have the misfortune to disagree with the conclusions reached by the President in relation to the question of whether the Transition Date occurred and whether the second HOA came into operation. However, I agree with the conclusions reached by the President on all other questions, for the reasons proposed by his Honour.
[28]
Conclusion
It follows that I would dismiss the appeal but would allow the cross appeal. The orders made by the primary judge should be set aside and ASC should be directed to bring in short minutes of orders to be substituted for those made by the primary judge to reflect these reasons. Forgacs should be ordered to pay ASC's costs of the appeal and the cross appeal.
[29]
Endnotes
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 (Mason J); [1982] HCA 24; Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184 at [69]-[74] (Leeming JA, Ward and Emmett JJA agreeing).
JD Heydon, Heydon on Contract, (2019, Thomson Reuters), at [9.1300].
Crawford Fitting at 444C-D (McHugh JA, Priestley JA agreeing), 454D (Clarke JA).
(1957) 98 CLR 193; [1957] HCA 90.
Ballas at 197.
Affidavit, James Alexander Cuthill, 4 August 2017, par 277.
The lowercase roman numerals (i) and (ii) have been added to improve readability.
The appellant will be referred to as 'Forgacs' as opposed to 'Donau' for consistency.
Donau Pty Limited v ASC AWD Shipbuilder Pty Limited [2018] NSWSC 1273 (Primary Judgment) at [179].
See Primary Judgment at [68].
See Primary Judgment at [86].
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: 26 July 2019
Parties
Applicant/Plaintiff:
Donau Pty Ltd
Respondent/Defendant:
ASC AWD Shipbuilder Pty Ltd
Cases Cited (41)
t/as Gloria Jean's Coffee v Western Exports Services Inc [2011] NSWCA 137
K & M Prodanovski Pty Ltd v Callidan Insurance Ltd [2012] NSWCA 117
Lindsay-Owen v Winton Partners Funds Management Pty Ltd [2017] NSWCA 78
Lyon v Creati (1892) 18 VLR 629
Mainteck Services Pty Ltd v Stein Heurtey SA (2014) 89 NSWLR 633; [2014] NSWCA 184
Masters v Cameron (1954) 91 CLR 353; [1954] HCA 72
Maynard v Goode (1926) 37 CLR 529; [1926] HCA 4
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37
Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29
Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1; [1946] HCA 48
Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40
The Picturesque Atlas Co Ltd v Searle (1892) 18 VLR 633
Thompson v Australian Capital Television Pty Ltd (1996) 186 CLR 574; [1996] HCA 38
Texts Cited: JD Heydon, Heydon on Contract, (2019, Thomson Reuters)
K Lewison and D Hughes, The Interpretation of Contracts in Australia (2012, Lawbook Co)
J Spigelman, "From Text to Context: Contemporary Contractual Interpretation" (2007) 81 ALJ 322
Category: Principal judgment
Parties: Donau Pty Ltd (Appellant/Cross-Respondent)
ASC AWD Shipbuilder Pty Ltd (Respondent/Cross-Appellant)
Representation: Counsel:
N C Hutley SC, E Bathurst (Appellant/Cross-Respondent)
I M Jackman SC, E Holmes, R Mansted (Respondent/Cross-Appellant)
Solicitors:
McCabe Curwood (Appellant/Cross-Respondent)
Johnson Winter & Slattery (Respondent/Cross-Appellant)
File Number(s): 2018/308578
Decision under appeal Court or tribunal: Supreme Court
Jurisdiction: Equity - Technology List
Citation: [2018] NSWSC 1273
[2018] NSWSC 1589
Before: Ball J
File Number(s): 2016/163292
HEADNOTE
[This headnote is not to be read as part of the judgment]
The Commonwealth entered into a project with ASC AWD Shipbuilder Pty Ltd (ASC) and another company for the procurement of air warfare destroyers. ASC subcontracted the construction of parts of each ship to a number of companies, including Donau Pty Ltd (formerly Forgacs Engineering Pty Ltd) (Forgacs). ASC and Forgacs entered into a subcontract on 20 August 2009 (the Original Contract).
Under the Original Contract, in addition to compensation for costs incurred, Forgacs was to be remunerated by a "Payable Fee". The Payable Fee was calculated as a function of costs incurred, adjusted by reference to whether Forgacs outperformed or underperformed the target costs for the whole of the work. Because it was not possible to determine Forgacs' performance against target costs until completion, the Contract provided for the quarterly calculation of the expected Payable Fee based on actual performance to date and for the payment by ASC, or refund by Forgacs, of a proportion of the fee as adjusted at each fee payment period. The Original Contract prescribed a process for the issuance and variation of work orders which proved to be ill-adapted to accommodate design changes.
Following a series of formal and informal variations to the Original Contract, the parties entered into negotiations to agree on what was termed the "Second Heads of Agreement" (the 2HA) to promote "cost and performance efficiencies". The 2HA was entered into on 26 October 2012 which was the "Effective Date" of the 2HA. Certain key provisions of the 2HA contained in cl 2.1, however, were only to come into effect on the "Transition Date", which was said to be the earlier of the date set out in cl 4.1 and the date on which the parties agreed "Baseline True Up". Clause 4.1 made reference to two dates: it imposed upon the parties a reasonable endeavours obligation to complete Baseline True Up by 14 December 2012, and provided to ASC a right to terminate the 2HA if Baseline True Up was not agreed by 28 February 2013. Clause 2.1(a) of the 2HA fixed "Payable Fee on all Payable Costs incurred prior to the Transition Date" at twelve percent. The 2HA also contained a release from certain claims which arose, accrued or existed before the Effective Date. Baseline True Up was not agreed by 14 December 2012 nor by 28 February 2013. The parties continued to negotiate Baseline True Up in good faith through to early June 2013 but never reached agreement. On 7 June 2013, ASC purported to exercise its right to terminate.
The issues on appeal were:
Whether the Transition Date occurred, and, if so, when;
If the Transition Date occurred, whether ASC validly exercised its right to terminate, or whether ASC:
1. had elected to affirm the 2HA; or
2. did not terminate the 2HA within a reasonable time;
Clause 21.8 dealt with "Payment". Prior to any claim for payment, Forgacs was required to conduct and successfully complete an audit to determine whether, in ASC's opinion, Forgacs' financial and record keeping systems were able to provide the information needed by ASC to verify claims for payment or performance of Forgacs' obligations under the Original Contract and to capture, process and report transactions in accordance with the requirements of the Original Contract, other than as to the Earned Value Management System (EVMS) conforming with the requirements of an approved earned value management plan. Under cl 22.2.1, Forgacs was required to establish the EVMS in accordance with Annexure A (scope of work) and in compliance with Australian Standard AS 4817-2006 (Project Performance Measurement Using Earned Value).
Clause 21.8.3 provided that ASC would pay Payable Costs monthly in arrears on receipt of a valid tax invoice. Payable Costs were to comprise:
If the Transition Date occurred, what was the effect (on the Original Contract) of the period during which the 2HA was in force, in respect of:
1. the liquidated damages release in the 2HA, on the assumption that ASC's termination of the 2HA was valid; and
2. the regime for the calculation of fees.
The Court held (Bell P, Basten JA, Emmett AJA dissenting in part), allowing the appeal:
In relation to Issue 1
Per Bell P (Basten JA agreeing)
1. Baseline True Up was not a condition precedent to cl 2.1 coming into effect. The definition of Transition Date expressly contemplated that it may occur prior to any agreement on Baseline True Up. Implicit in the 2HA affording to ASC a right to terminate if Baseline True Up was not reached by 28 February 2012 was the proposition that the agreement could operate without Baseline True Up having been agreed: [46]-[71] (Bell P); [154] (Basten JA).
2. The Transition Date was 14 December 2012. That was the date "set out" in cl 4.1, whereas the second date in cl 4.1 was contained in a proviso. A clause incorporated into the 2HA which provided that the singular included the plural also supported this construction. The "hiatus" between 14 December 2012 and 28 February 2013 did not provide a convincing reason to prefer the later date because, unless ASC terminated on the stroke of midnight on 28 February 2013, there would still be a hiatus between the Transition Date and any termination. In any event, the hiatus had a commercial explanation: [72]-[83] (Bell P); [154], [171] (Basten JA).
Per Emmett AJA (dissenting)
1. The Transition Date could not occur before agreement as to Baseline True Up was reached. Baseline True Up was fundamental to the new provisions that were to apply from the Transition Date and the entire bargain was predicated on its being agreed: [207]-[217] (Emmett AJA).
In relation to Issue 2(a)
Per Bell P (Basten JA and Emmett AJA agreeing)
1. ASC did not lose its right to terminate by election. The fact that the parties continued to seek to agree Baseline True Up after 28 February 2013 and that ASC had a reasonable time after that date within which to terminate the 2HA served to render ASC's conduct equivocal. This was particularly so considering the imprecise nature of what was a reasonable time within which to terminate and the parties' tendency to operate outside the precise terms of their contractual arrangements: [84]-[91] (Bell P); [154] (Basten JA); [218] (Emmett AJA).
In relation to Issue 2(b)
Per Bell P (Emmett AJA agreeing)
1. ASC failed to exercise its right to terminate within a reasonable time. The longer the parties operated under the new regime, the more difficult it would be to revert to the former regime. The right to terminate was not dependent upon the receipt by ASC of any further information. As the reasonable endeavours obligation expired on 14 December 2012, ASC was on notice of the risk of Baseline True Up not being agreed for a considerable period, and had that period to decide whether it wished to exercise the right to terminate if and when it arose. It was not "apparent" from the continued Baseline True Up negotiations that ASC was reserving its right to terminate: [119]-[130] (Bell P); [218] (Emmett AJA).
Ballas v Theophilos (No 2) (1957) 98 CLR 193; [1957] HCA 90, considered and applied.
1. The legal meaning of what is a reasonable time within which to exercise a right or perform an obligation is to be ascertained as at the date of the contract, although what will be reasonable as a matter of fact will inevitably fall to be assessed by reference to circumstances as at the date on which the right is first capable of being exercised: [99]-[111] (Bell P); [218] (Emmett AJA).
2. What is a reasonable time in any given case may be affected by the nature of the obligation to be performed or of the right to be exercised: [104] (Bell P); [218] (Emmett AJA).
Per Basten JA
1. It is preferable to treat the issue of reasonable time as a question of contractual interpretation. The objective approach to contractual interpretation frees the courts from the constraining influence of reflecting upon the actual intention of the parties. This approach controls factual disputes relating to pre-contractual negotiations and post-contractual conduct: [154]-[168] (Basten JA).
2. ASC failed to exercise its right to terminate within a reasonable time. Only ASC had the power to terminate the uncertainty as to the contractual arrangements. The exercise of the right did not involve any circumstance involving investigation or uncertainty. Board approval of the decision to terminate should have been acquired and conveyed to Forgacs by no later than the end of April 2013: [169]-[177] (Basten JA).
In relation to Issue 3(a)
Per Bell P (Basten JA and Emmett AJA agreeing)
1. The 2HA not having been validly terminated, it was not strictly necessary to deal with ASC's contention that, because its claim for liquidated damages was made after the purported termination of the 2HA, the release did not preclude that claim. Had the 2HA been validly terminated, however, the release would still have had the effect of precluding ASC's claim for liquidated damages. The release was not conditional on the continued operation of the 2HA, and the suggestion that the release was "suspensory" sat uncomfortably with the fact that a release extinguishes a cause of action: [131]-[138] (Bell P); [154] (Basten JA); [218] (Emmett AJA).
In relation to Issue 3(b)
Per Bell P (Basten JA and Emmett AJA agreeing)
1. Properly construed, cl 2.1(a) fixed the Payable Fee at 12 percent from the inception of the Original Contract until the Transition Date, rather than from the inception of the 2HA until the Transition Date. The use of the word "all" in the clause tended against the narrower temporal limit. Given Payable Fee was to be calculated quarterly, and the longest possible period between the Effective Date of the 2HA and the Transition Date was 7 weeks, it would be somewhat surprising for cl 2.1(a) to have such prominence in the 2HA on the narrower construction. A recital to the 2HA also made clear that the 2HA was introduced to effect an amendment to the Original Contract, and the clause formed the first of a set of provisions relating to the whole of the project. On this construction, the Effective Date of the 2HA still had work to do: [139]-[149]; (Bell P); [154] (Basten JA); [218] (Emmett AJA).