FPM Constructions P/L v. The Council of the City of Blue Mountains [2003] NSWSC 201

The amount approved for payment, referred to as Progress Payment No. 8, was reduced by $153,466.50 by this adjustment. A document accompanying the Progress Certificate explains this adjustment as follows: Preliminaries (4.3% being the value of the completed building works as a ratio of the total building works) $21,996.87 . 6 This was a departure from the approach taken earlier. On 20 May 2002 the Contractor made Progress Claim No. 5 for a payment which included: "Description Preliminaries Contract Value $745,974. Percent Complete 5%. Amount claimed $37,298.70." This was accepted in a letter of 3 June 2002 accompanying the Progress Certificate issued on that claim. Progress Payment Claim No. 6 made on 4 November 2002 included a claim for "Description Preliminaries Contract Value $511,555.00. Percent Complete 25%. Amount claimed $127,888.75." The Progress Certificate issued on this claim on 12 December 2002 does not appear to have departed from this part of the claim. 7 It appears then that $127,888.75 for Preliminaries which had been included in earlier certificates was treated in Progress Certificate dated 3 February 2003 as having been an overpayment to a very great extent; the previous allowance of $127,888.75 became an allowance of $21,996.87, implying that the Superintendent had previously allowed $105,891.88 too much. This precipitated a notification of dispute dated 25 February 2003 by the Contractor supported by the following details. The Principal is notified that a dispute has arisen between the Principal and the Contractor under the Contract. The dispute concerns the payment certificate issued by the Superintendent in the amount of $22,962.39. The details thereof are as follows: 1. The Contractor submitted Progress Payment Claim No. 7 on 17 January 2003. Within this claim an amount of 34.3% was claimed for preliminaries. 2. At the time of tender a predicted cashflow was submitted which indicates that Preliminaries would be claimed on a time basis. 3. This cashflow is bound into the contract. 4. Between November 2001 and November 2002 numerous revised programmes and cashflows were submitted and not once was the cashflow queried. 5. The Superintendent in issuing payment certificate no. PP8 has decided to base the valuation of Preliminaries as a percentage completed in relation to the building works. This has created a shortfall of $153,466.50 and is the cause of the dispute. Unless settled, you may give a written response to this notice of dispute to the Contractor and to the Superintendent within 28 days of receipt of this notice. If you fail to give such response, the Superintendent is nevertheless required to give a written decision on the dispute within 42 days after the date of service of this notice on the Superintendent. 8 What underlies paras 2 and 5 is, as I understand with the assistance of the contentions of counsel, that the Contractor claimed 34.5% of the amount attributed to Preliminaries on a time basis meaning the proportion borne by the time which had passed when the progress claim was made to the whole time available under the contract for performance of the work; but the Superintendent allowed a proportion of Preliminaries on a percentage-of-works-completed basis meaning that he assessed the ratio which the value of the building work which had been completed bore to the value of the whole building work under the contract: he assessed that ratio at 4.3% and allowed the total sum allocated to Preliminaries for the whole contract. 9 Notwithstanding what the Contractor's counsel contended it does not appear to me that all earlier progress claims had been made and had been allowed on a basis of even progression of time applied to total contract sum attributed to Preliminaries. Progress Payment Claim No. 5 dated 20 May 2002 (p35 of affidavit of Mr Yazbek 26/2/03) does not proceed on that basis but claimed, in May 2002, that Preliminaries (there said to be $745,974) were 5% complete so that the claim was for $37,298.70, and this was allowed. This does not seem to be consistent with the position which the plaintiff now puts. Progress Payment Claim No. 6 dated 4 November 2002 included a claim for Preliminaries, said to have a contract value of $511,555.00, as 25% complete so the amount claimed was $127,888.75; and this appears to have been accepted in the Progress Certificate of 12 December 2002. Whatever basis was acted on earlier, the Progress Certificate dated 3 February 2003 allowed only $21,996.87 which was less than had been allowed on the claim made on 20 May 2002. The Progress Certificate dated 12 February 2002 had the effect of taking back money which had earlier been paid. 10 As well as giving notice of disputes and following the dispute mechanism in cl.47 the plaintiff initiated these proceedings on 26 February 2003 claiming declaratory relief and an order for payment of the amount of $153,466.00 by which the Progress Certificate of 3 February 2003 was less than Progress Claim No. 7. (I interpose that this is a different sum to the part of the reduction flowing from the difference of view about the allowance for Preliminaries.) The plaintiff also claimed a declaration, set out in the Amended Summons of 7 March 2003, as follows: 1. A declaration that on a proper construction of the agreement between the parties, dated 17 October 2001 and in particular, the document titled 'tender cash flow' incorporated therein and variations thereof, that the Plaintiff is entitled to claim from the Defendant each month during the period an amount for Preliminaries is recorded on the said tender cash flow document or variations thereof, a sum calculated as $2,131.48 for each working day in each such month. 11 When the proceedings came before me on 7 March the defendant's counsel filed in court Notice of Motion claiming (1) Stay of the proceedings under s.53 of the Commercial Arbitration Act 1984, (2) summary disposal of the proceedings under Part 13 Rule 5 of the Supreme Court Rules, (3) an order for security for costs and (4) a stay of proceedings until security was provided. As argument progressed and these claims were dealt with I made a number of rulings on the various claims in the Notice of Motion. I declined to stay the proceedings because a claim for urgent declaratory relief is authorised in terms by cl.47.4. It was clear from evidence read for the Contractor that the declaratory relief sought was urgent because the Contractor was faced with severe financial difficulty, to the point where it was not in a position to continue with the work and retain its subcontractors, but would lose them in the fairly near future, and this shortage of funds was directly related to the Superintendent's ruling, on the assumption that the Superintendent's ruling is not correct and that a much larger sum ought to have been allowed. I was not prepared to dismiss the proceedings summarily because it appeared to me that the reason which the Superintendent gave for allowing a relatively small sum for Preliminaries was reasonably open to contest and to resolution by a declaratory order; its openness to contest is well illustrated by its being different to the basis on which earlier progress claims were apparently allowed. Its openness to contest further appears by considering the terms of cl.42.1 relating to inclusion of the value of work in a certified payment; it is reasonably arguable that the value of the work relating to Preliminaries is to be determined by addressing and valuing that work, and not by applying the percentage-of-work-completed basis, which does not appear in cl.42, when valuing work done on Preliminaries at all. 12 I was not prepared to order security for costs because of a number of considerations. The Contractor is, on the face of the record, the plaintiff but the controversy was precipitated by a very large change of position by the Superintendent, an officer appointed by the Principal, which produced a huge reduction in the amount of a progress payment which the Contractor claimed and, on an earlier ruling, could reasonably have expected to receive. The Superintendent appointed by the Principal made a large contribution to initiation of the dispute. The Contractor's evidence showed (a position not at all unusual in building contracts) that the Contractor was dependent on the flow of money from progress payments to maintain activity, and was unable to continue and to retain its relationship with subcontractors if it did not receive some such amount as was claimed or if it was left to pursue the lengthy course of dispute resolution pointed out by cl.47, with its stately 98-day progression from notice of dispute to reference to arbitration. Evidence showed that the Contractor was not in a position either to carry on with the work or indeed to give security for the Principal's costs in any large amount, or in any amount which might be significant, so that a decision to require security for costs would with fair certainty have prevented the Contractor from ever achieving a ruling by the Court; if it should be the case that the Contractor is entitled to succeed, the order for security for costs would defeat justice. Evidence showed that the individuals who stand behind the Contractor are in no better position to give security. The financial position of the Contractor was precarious, it had taken over from the original contractor which had not been able to manage its finances, and it had encountered difficulties which led to a special arrangement under which consultants who were subcontractors were paid directly by the Principal. An order for security for costs would defeat the whole litigation; but that is not the object with which the Court makes an order for security for costs. Another important matter was that the Principal was already very well protected in other respects by contractual provisions which have enabled it to retain large sums for retention moneys and a security deposit of $30,000, and these are retained on the assumption that the Contractor has earnt them. 13 To my mind these considerations greatly outweighed the claim by the Principal to be protected in respect of its potentially obtaining an order for payment of its costs. A relatively simple application for a declaratory order of a kind which cl.47.4 authorised was met with an array of interlocutory claims of small substance which expanded the ambit of facts and matters under debate to about three times their original dimensions: such complexity and burden of costs as the litigation imposed on the Principal was largely created by the Principal's Notice of Motion. This did not seem to me to be a case in which security for costs should be ordered. 14 In their Progress Claims and Payment Certificates both parties referred to Preliminaries as a term identifying a category of work to be performed under the contract. There is no material internal to the contract documents which identifies what part of the contract work is referred to as Preliminaries. Identifying the subject matter referred to by an expression used in a contract is something which can be dealt with by evidence showing the parties' common understanding of the expression, including evidence of their use of the expression in pre-contract communications; however no evidence was tendered other than the contract documents themselves. The Tender was submitted in response to tender documents which include, among many other things, 4.0 Conditions of Tendering, Tender Form and Schedule and under cl.4.14 Design Proposal. The tenderer was required to submit with the Tender a design proposal which was to include a number of things including "Budget Break Down" and "Predicted Cash Flow". Also incorporated in the contract is the Tender Form dated 6 March 2001 submitted by Fyntray Constructions Pty Ltd; part of that form is 4.15.2 Schedule of Tender Break-down which has the heading "This Schedule is not part of the Contract. It is only for assisting the Superintendent to value the work for progress payment purposes. The Superintendent is not bound to use the Schedule." The Schedule incorporates a document headed "Brief Estimate Summary" which breaks the estimate down into 30 categories referred to as "Trade Description"; category number one is "Preliminaries" for which the total given is $511,555.00. 15 The Tender also includes a document entitled "Tender Cash Flow" which projects the payments which the contractor expected to receive during the work. The Tender Cash Flow is broken down into many categories (not the same 30 categories as the Brief Estimate Summary), and one of them is Preliminaries, for which no cash flow is shown for the first five months from March to July 2001; but from August 2001 to July 2002 cash flow for Preliminaries is shown for each month. The amounts vary, but I was told that the variations represent the projected number of working days in each month and that the cash flow each month is directly proportional to the number of working days projected. The Tender Cash Flow does not state this, but it can be ascertained arithmetically. Another document in the tender is the Tender Program which illustrates diagrammatically the times during progress of work at which particular parts of the work were to be carried out. This shows that Preliminaries were to occupy 240 days commencing on Friday 17 August 2001 and concluding 18 July 2002. 17 August 2001 was the program date on which work on the site, including site establishment, structural and steelwork were to commence; to be followed shortly by demolition, ground works and other work on site, as well as work off site. 16 No-where in the contract documents is there an express promise, assurance or statement that payment for Preliminaries would be made at any particular time, or at an even rate throughout the job, or at any particular rate. Argument by the Contractor's counsel in support of the claim for a declaration turned primarily on the incorporation of the Tender Cash Flow document into the contract. This incorporation is quite clear and was recognised by the Principal's letter of 17 October 2001 to Fyntray Constructions Pty Ltd, itself incorporated in the contract documents, which lists many documents copies of which are to be included, including the tender of which the Tender Cash Flow is part. Counsel's argument revolved around the rhetorical question - What is to be made of the fact that the Tender Cash Flow has been incorporated into the contract? It was contended that the Tender Cash Flow has to be given a meaning because it has been included in the contract. Counsel pointed to statements in the tender documents requiring the tender to give a Budget Break Down and a Predicted Cash Flow, and he observed that the Principal wanted them and got them. The Tender Cash Flow shows how the lump-sum payable to the builder was made up. Counsel observed that the Tender Cash Flow tells the Principal when it has got to have its money available to pay off the contracted lump sum. He contended that it should be inferred that the Principal wanted to know how much it was going to be liable for every month to pay off the lump sum; and the Contractor also wanted to know how much the Principal was going to pay each month so that the Contractor could budget for the work. He contended that the Tender Cash Flow was a document on which the parties would rely. 17 Counsel contended that the Tender Cash Flow document is part of the matrix of facts in which the parties acted and of which they were aware when entering into their agreement. Counsel referred to the passage in Codelfa Constructions Pty Ltd v. State Rail Authority of New South Wales (1982) 149 CLR 337 (Mason J) at 350-352, in which Mason J referred to authorities supporting the admissibility of evidence of the genesis and objectively the aim of the transaction to show that the attribution of a strict legal meaning would make the transaction futile. 18 Contractor's counsel also referred to Schenker & Co. v. Maples Equipment [1990] VR 834 (McGarvie J) at 840: In its construction of cl.3 the court is seeking to ascertain what reasonable business people in the positions of Maplas and Schenker, if they had applied their minds to it at the time of contracting, would have regarded the clause as meaning. The approach suggested by Shaw L.J. in Nea Agrex S.A. v. Baltic Shipping Co. Ltd. [1976] Q.B. 933, at p. 954 is a useful one to apply to this case. First, ask what in the circumstances a person in the position of Maplas would have supposed Schenker meant by the clause, then ask what a person in the position of Schenker would have supposed Maplas understood the clause to mean. This approach emphasises that the essential question is what would reasonable business people in the position of the parties have taken the clause to mean. The cases give guidance on the approach to the construction of commercial contracts. Isaacs J. said in Cohen & Co. v. Ockerby & Co. Ltd. (1917) 24 C.L.R. 288, at p. 300: "… the expressions, and particularly any elliptical expressions, in a mercantile contract are to be read in no narrow spirit of construction, but as the Court would suppose two honest business men would understand the words they have actually used with reference to their subject matter and the surrounding circumstances." See also Hillas & Co. Ltd v. Arcos Ltd. (1932) 147 L.T. 503, at pp.512 and 514 and [1932] All E.R. Rep. 494, at pp. 499 and 503-4. In Council of the Upper Hunter County District v. Australian Chilling and Freezing Co. Ltd. (1968) 118 C.L.R. 429, at p. 437, in speaking of the ascertainment of the parties' contractual intention, Barwick C.J. observed that: "In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements." 19 It was contended that the effect of the documents is that the parties have made an arrangement about payment for work which takes payment for Preliminaries out of the ordinary workings of cl.42.1. This is so because the Tender Cash Flow gives a horizontal straight-line projection for payment for Preliminaries and does so in answer to the Principal's call for a projection of cash flow. I asked why the application of the Tender Cash Flow and implications drawn from it to times at which there was to be an entitlement to payment differs in the case of Preliminaries from their application to other work; my inquiry was prompted by the consideration that cl.42.1 refers to the assessment of payment by reference to the value of work carried out by the Contractor in the performance of the contract, and that test would not be truly applied in the case of any contract work other than Preliminaries by considering how much of the available time had passed or by simply applying the proportion of the whole work under the contract which had been completed. In response counsel observed that for no other part of the work or classification of the work by trade or otherwise does payment continue across the whole of the Tender Cash Flow document at an even rate per month. Preliminaries is the only category which extends across the whole duration of the contract. Counsel contended that the Tender Cash Flow would not be in the form it takes if the intention of the parties had been that work under the heading Preliminaries was simply to be performed and paid for at the rate at which it was performed; if that was contemplated the cash flow would not be in the form it takes. 20 Counsel for the Principal contended that there is no substantial reason, on the terms of the documents, for treating entitlement to payment for Preliminaries as governed or as in any way controlled by the Tender Cash Flow, when other parts of the work are not to be treated as so governed or controlled. He observed that if the Contractor's submission were correct, certification would be more or less superfluous or would be pre-determined; this observation could only be correct as to Preliminaries, but not as to other parts of the contract work. 21 The Principal's counsel contended that the terms of the claim for a declaration do not reveal the true matter in difference, that is what method of valuation ought to be used by the Superintendent in determining what sum to include in a progress payment for Preliminaries. The Principal's counsel contended that the Court should not be involved in whether the Superintendent is applying the correct valuation method. Counsel said to the effect that in approaching the test of value in cl.42.1 it was necessary for the Superintendent to have a view about the appropriate valuing method to produce the value of the work carried out to the Principal. Counsel said that many items can be referred to as Preliminaries which have no value on a general use basis, such as work in setting up the work place, site sheds, and bringing tools and equipment on site; and he contended that the view is available that doing these things has no value to the owner until the building is completed. As the contractor for example owns site sheds it is possible for him, having brought them on to site, to take them away again, depriving the project of the value of the sheds' being on site. He said that a site shed has no value to the Principal until such time as the site shed has been utilised throughout the duration of the project. Counsel contended that these reasons show that the Superintendent's determination of the value of items which are Preliminaries by relating them to the proportion of the whole of the works which have been completed was a reasonably available valuing method. Counsel asked rhetorically - When cl.42.1 refers to the value, the question is the value of the work to whom? He contended that it is the value to the Principal as distinct from the cost of the work to the Contractor. He contended that Contractor's costs should be differentiated from values of the Principal. 22 To my mind much the same observation can be made of every category: in terms of value to the owner, the first quarter or the first half of, say, construction of steel work has very little value; until the whole work is completed the partly constructed works lack utility. 23 Address to the matters debated is greatly hampered by there being no evidence establishing what the parties had in contemplation as Preliminaries. In my opinion however there is no reasonable basis for regarding the construction of Cl.42.1 and its statement of the test to be applied in determining the amount of the payment which the Superintendent is to certify as controlled or qualified by or indeed as affected at all by the Tender Cash Flow; and there is no reason for supposing that the horizontal straight line projection of the flow of payment in the Tender Cash Flow means or implies that the Contractor has an entitlement to an even flow of payments for Preliminaries throughout the time available for the work. The Tender Cash Flow is no more than the expressions in the tender show that it is; the Principal required that the Contractor make a projection of the cash flow and the Contractor did so. The projection meant no more than that, as foreseen by the Contractor, if events went as contemplated the cash flow would be as appears in the projection. There is no difficulty in seeing good reasons for the Principal to wish to have the Contractor's projection, and for the Contractor to give it, without supposing that anything in it was to be of binding force, or was to alter the effect of other parts of the document which were plainly intended to be binding. 24 There is no room for any implication that the Tender Cash Flow was intended to be of binding force, or that either side gave a promise to achieve or was committed to achieving the projected rate of payments, no more for Preliminaries than for any other class of payments. There is no reason to conclude that the projection of a rate of payment for Preliminaries is to have any greater or different influence on determination of amounts payable than the projection of payments for any other class of work. An implication of the kind contended for based on the Tender Cash Flow document would be inconsistent with clear expression in cl.42.1, both of the test and of the mechanism for making a determination. For these reasons I am of the view that I should refuse to make Declaration 1 as asked. 25 The declaration sought in the Amended Summons does not deal with what, to my mind, is the full range of considerations in a dispute s about the principles on which allowance should be made for Preliminaries. Neither the Contractor's method of applying a time-based proportion nor the Superintendent's most recent method of applying the percentage-of-work-completed basis has seemed to me to be at all likely to be the correct resolution. Both methods seem to me to suffer in a similar way; neither is an address to the value of the work classified as Preliminaries which has been carried out by the Contractor. The correct resolution probably is to be reached by some approach which ascertains what work described as Preliminaries has been carried out by the Contractor in performance of the contract, and addresses valuing that work. The estimate made at the time of the contract of the cost or value of Preliminaries over all seems to me to have little claim to be an integer in the exercise. 26 The Principal's counsel made it a matter of complaint that the limited terms of the declaration claimed meant that neither party had been called on to address whether the basis of the Superintendent's ruling was actually correct, except in relation to the particular view which a declaration as claimed would establish: and he complained that he had not been called on and had no opportunity to consider and produce evidence bearing on what valuing principle was appropriate and (as he claimed) on practices in the building industry about Preliminaries and their valuation. This was a hollow complaint indeed, as the likelihood that the correctness of the Superintendent's decision would come under examination was very clear, and the Principal gave much attention to futile interlocutory manoeuvres and Fabian strategy against a Contractor to whom time and money were vital, and it would have been a better use of time and endeavour to get up evidence dealing with the underlying controversy. 27 I am required by s.63 of the Supreme Court 1970 to determine the whole controversy and avoid multiplicity of legal proceedings. On the material before me, which indeed was directed only to trial of the Contractor's contention, I have not seen how the terms of Cl.42.1 or other terms of the contract would provide any justification for the reasoning of the Superintendent in relation to Preliminaries expressed in his ruling dated 29 January 2003. The Principal's counsel contended that it would not be procedurally just to come to a decision and dispose of the proceedings because, he said, the defendant has not been called on by the matter put in issue by the plaintiff to go into evidence in defence of the method actually adopted by the valuer; he contended that, if that had been in issue, it would have been material to tender evidence showing what is referred to as Preliminaries in usage in the building industry, and also evidence showing what valuing methods are adopted to make allowances for Preliminaries. I accept that an attack on the method adopted by the Superintendent may have dimensions which have not been explored by the evidence. On the other hand I feel that the validity of the basis on which Progress Claim No. 7 was ruled on is well open to further consideration and debate, and that the underlying controversy which led the plaintiffs to bring these proceedings has not been fully exposed, still exists and may require further attention of the Court. For this reason I am not now prepared finally to dispose of the proceedings, or to dismiss the Summons. 28

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Judgment (11 paragraphs)

Cases Cited (1)

Cited By (2)