Ede Excavations Pty Limited v Lake Macquarie City Council

Burger King Corporation v Hungry Jacks Pty Limited (2001) 69 NSWLR 558 CASES CITED: Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 Haviv Holdings Pty Limited v Howards Storage World Pty Limited [2009] FCA 242 Murray Irrigation Limited v Balston (2006) 67 NSWLR 73

PARTIES: Ede Excavations Pty Limited (Plaintiff) Lake Macquarie City Council (Defendant)

COUNSEL: Mr Nagle (For the Plaintiff) P Cummings (For the Defendant)

SOLICITORS: Slater & Gordon Solicitors (For the Plaintiff) Lake Macquarie City Council Corporate Legal Office (For the Defendant)

1 These proceedings involved a contractual dispute between EDE Excavations Pty Limited, an earthmoving contractor, and Lake Macquarie City Council. The contract between the parties related to the supply and operation of earthmoving plant and equipment by the plaintiff to the defendant at specified rates.

2 In November 2008, by agreement, I dealt with the issue of liability only and, in reasons published on 14 November 2008, I found in favour of the plaintiff on the basis that the defendant repudiated the contract by attempting to terminate it without complying with its provisions. The plaintiff accepted the repudiation and claimed damages.

3 On 17 August 2009 I heard the parties' arguments on the damages that resulted from the defendant's breach. The plaintiff claimed substantial damages for loss of profit; the defendant claimed that no damage was suffered because the terms of the contract did not oblige it to use the plaintiff's services.

4 In its ordinary statement of claim the plaintiff alleged damages on three bases, two of which were not pursued. The first was that it lost income at a rate of $1,500 per week; the second related to reasonable notice of 12 months which was not pressed and the third to lost opportunity to obtain contracts with associated New South Wales Government and Commonwealth agencies, in respect of which there was no evidence and it was not pressed.

5 There remained two issues; firstly the period over which the loss of profits should be assessed and secondly, the method of calculating the loss. As far as the period for determination of the quantum of damages was concerned, in its written submissions the plaintiff proposed a period of 20 years, that is until its principal Mr John Clinch reached retirement age of 67 years. A more moderate proposal was put forward at the hearing, namely loss of profits for two and a half years from December 2006 and a lump sum to compensate for a decreasing level of loss over a period of 10 years. The problems with this approach by the plaintiff were highlighted by the defendant.

6 The defendant argued that there were two bases upon which it could legitimately have withdrawn work from the plaintiff under the contract and the prospects were that in the circumstances of December 2006, where the relationship of mutual trust and confidence between the parties had been destroyed, the defendant would have employed one of them to withhold work from the plaintiff.

7 Clause 29(6) of the contract permitted the defendant to terminate the contract for its convenience at any time by giving written notice to the plaintiff. It further provided that if the contract were terminated pursuant to this clause, the plaintiff could not claim damages or loss including loss of profits, costs or expenses suffered by reason of the termination before the end of the term of the contract.

8 The difficulty with this argument was defining what was meant by convenience. The contract had specific provisions for dealing with termination for default by the contractor. It appeared to contemplate two scenarios, a minor default where damages were an appropriate remedy and a more serious default such as conduct outlined in clause 29.1.1 when a show cause procedure was required to be adopted.

9 It was apparent therefore that convenience did not include default, nor did it include disputes because clause 39 required that they be settled by negotiation through a formal dispute resolution process nominated by the defendant.

10 I already expressed the view in my reasons at 14 November 2008 that clause 29(6) did not allow the defendant to act capriciously but required that it exercise the rights provided for in the clause with good faith and fair dealing, based upon the principles that were summarised in Burger King Corporation v Hungry Jacks Pty Limited (2001) 69 NSWLR 558.

11 Thus while on the face of it the Council could, without providing reasons, at any time terminate the agreement, the width of the provision must be read down, to exclude situations such as those suggested by the defendant where the parties were in dispute.

12 It was made clear in Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 that the onus was on the defendant to establish that there were as at December 2006 matters of its convenience that would have led to the termination of the contract. Aside from the dispute with the plaintiff, no other matter was put forward in evidence. There was no evidence from the defendant that, had it followed the procedures provided for in the contract and allowed the plaintiff the opportunity to explain the discrepancies in the timesheets, it would nevertheless have proceeded to terminate the contract under clause 29(6) or indeed under clause 29.1.2.

13 The second basis for the defendant's argument was that the terms of the contract provided a procedure under which the defendant had the right, on the basis of the standing offer tendered by the plaintiff, to place orders with the plaintiff from time to time for the provision of plant and equipment and an operator. The contract did not oblige the defendant to place any orders with the plaintiff and whether any work was to be directed to the plaintiff was left entirely in the hands of the defendant.

14 The same considerations as already outlined applied to the question of whether the defendant would merely have ceased providing orders for work with the plaintiff. The contract imposed considerable obligations on the plaintiff in terms of having plant and equipment and an operator available; the standard of maintenance of the plant and equipment; the provision and maintenance of insurance policies and the observation of standards of occupational health and safety.

15 The plaintiff pointed out that it had secured contracts with the council between 2001 and 2006 and that during the term of those contracts orders were placed with it on a regular basis so that almost all of the operations of its plant and equipment were dedicated to fulfilling those orders. There was no evidence provided by the council that there was a downturn in the availability of work requiring the services provided by the plaintiff.

16 In the circumstances, I find that there was no evidence that the defendant was probably likely to cease placing work with the plaintiff. I find that in the absence of evidence that it was inevitable that the contract would have been terminated or that circumstances existed that would justify a decision not to place further work with the plaintiff while the contract remained on foot, it was probable that the defendant would have continued to place orders under the contract that expired on 30 June 2007 with the plaintiff and to provide the plaintiff with the substantial part of its profits.

17 In determining the period over which the plaintiff might legitimately claim loss and damages beyond the term of the contract, I noted that the plaintiff did not plead loss of opportunity to secure further contracts. Rather it appeared to rely upon an expectation that further contracts would be forthcoming. The contracts were awarded to the plaintiff from July 2001 to July 2006 for 12 month periods. They depended upon the submission annually of acceptable tenders. The plaintiff argued that over the period 2001 to 2006 there had been established a relationship that was mutually beneficial and that would have led to ongoing annual contracts.

18 The plaintiff relied upon a number of authorities that I did not find helpful because they depended upon their own facts and contractual provisions. The decision of Jagot J in Haviv Holdings Pty Limited v Howards Storage World Pty Limited [2009] FCA 242 that was referred to in claiming damages extending over 10 years involved a contract that ran for a term of 10 years with an option to renew for a further 10 years. That was far removed from the situation in this case where the terms of the contracts were one year only.

19 In responding, the defendant relied upon the decision of the Court of Appeal in Murray Irrigation Limited v Balston (2006) 67 NSWLR 73 where Bryson J at 49 said: Entitlement is not to be tested by intention, expectation or the likely future course but by the existence of a contractual entitlement to employment. Damages can only be awarded for failure to conform with what has been contractually promised.

20 This statement was endorsed by Handley J at [1] who noted that the principle was not inconsistent with the award of reliance damages in the form of wasted expenditure in Commonwealth v Amann Aviation Pty Limited. Nor, he said, were expectation damages awarded in that case for any period including a period in excess of the legal obligations of the Commonwealth.

21 Both parties relied on the Amann decision but I did not think it was particularly helpful to the plaintiff for the reasons stated by Handley J that I have already noted. The judgments of the High Court in Amann confirmed a number of basic principles concerning the assessment of damages for breach of contract and its confirmation of those principles encompassed the statements made by Handley J and Bryson J in Murray Irrigation.

22 Having considered the reasons published by the High Court in Amann, I came to the conclusion that this was not a situation, as in that case, where circumstances suggested that the defendant had virtually no alternative but to renew the contract with the plaintiff. The process by which contracts by the defendant were awarded annually was one of open public tender. The plant and equipment provided by the plaintiff was not custom designed to meet the defendant's specific requirements. It could be supplied by other contractors whose rates might be more competitive than those of the plaintiff. The plaintiff's plant and equipment could be used in work other than that ordered by the defendant. There was therefore no wasted expenditure involved if a fresh contract was not awarded. The result was that I could not fairly conclude that the defendant promised more than that it would place orders with the plaintiff, in response to his standing offer, beyond 30 June 2007.

23 In dealing with the quantum of damages, the plaintiff claimed loss of profits as calculated by his accountant Brett Walker. The defendant relied upon the figures produced by its expert accountant Suzanne Delbridge-Bailey. A number of differences between them were resolved prior to the hearing but they remained at issue on the manner in which the expense of paying a wage to the operator of the plant and equipment was to be calculated. Mr Walker's approach was that the flexibility of the owner/operator arrangement through the medium of a corporate structure allowed wages to be paid to the plaintiff's principal Mr Clinch to be set at a figure that minimised his tax obligations and took advantage of a company tax rate of 30 percent. Ms Delbridge-Bailey's view was that the appropriate figure at which to assess wages could be arrived at by reference to the publication "What Jobs Pay 2008-2009" for an earthmoving plant operator. She adopted a figure of $45,000 to $49,000 with various adjustments that were set out in her report. She explained that, at this level, personal tax and company tax were the same at 30 percent and, therefore, there was no advantage to be gained in limiting the operator's income to $25,000 per annum as suggested by Mr Walker.

24 I accepted the evidence of Ms Delbridge-Bailey. There was no appropriate basis to calculate the plaintiff's profit on an assumption that the operator would be paid $25,000 per annum except to maximise the claimed losses. My function is to restore the plaintiff, as best as possible, to the profit it would have achieved but for the defendant's breach of contract. Accepting the calculations of Ms Delbridge-Bailey and applying them to 30 June 2007, I find that loss to be $10,317.

ORDERS

1. There will be verdict and judgment for the plaintiff in the sum of $10,317.

2. The defendant is to pay the plaintiff's costs of the proceedings with the exception that the plaintiff remains obliged by the order made on 20 May 2009 to meet the defendant's costs of the adjournment granted on that date.

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.