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[2003] FCA 50
Federal Court of Australia
2003-07-01
Original judgment source is linked above.
INTRODUCTION 1 The title of Allan Farnsworth's recent book, Changing Your Mind: The Law of Regretted Decisions, encapsulates the burden of this proceeding and the issues it raises. Two of the principal actors, GEC Marconi Systems Pty Ltd ("GEC Marconi") and the Commonwealth, made contractual commitments and then sought to resile from them. This litigation reflects the consequences of their actions. 2 On 14 September 1994 the Commonwealth and BHP Information Technology Pty Ltd ("BHP-IT"), and then BHP-IT and EASAMS (Australia) Ltd ("EASAMS") - a predecessor of GEC Marconi - entered into back-to-back fixed price contracts for software development and systems integration in Phase 2 of the Australian Diplomatic Communications Network Project ("ADCNET"). The Diplomatic Communications Network was a secure network for communication to and from Australia's overseas missions. It was operated from Canberra through the Department of Foreign Affairs and Trade ("DFAT") as a service to all Australian Government agencies. 3 The ADCNET project had several facets. One involved upgrading and enhancing the security of that Network using new technologies. A security element envisaged in the project required the use of boundary security devices which prevented classified data being sent from ADCNET computers to less secure networks as a result of errors in computing software or equipment, or because of successful attacks on ADCNET computers. The actual boundary security devices to be used in implementing the back-to-back contracts ("the STUBS devices") were to be supplied by the Commonwealth to BHP-IT, which in turn would supply those devices to GEC Marconi for integration with the ADCNET software being developed by GEC Marconi. Each contract at the time of its execution had provisions to this effect. 4 GEC Marconi took over EASAMS in about October 1994. The EASAMS contract with BHP-IT was then novated to substitute GEC Marconi for EASAMS as the contractor. 5 The failure of the Commonwealth, hence of BHP-IT, to supply the STUBS devices provided one of two alleged breaches of the BHP-IT/GEC Marconi contract relied upon by GEC Marconi to justify its termination of the contract. The other alleged breach related to the non-payment of a contractual milestone ("Milestone 4000"). 6 The ensuing legal proceeding initiated by GEC Marconi against BHP-IT led to cross-claims, first, by BHP-IT against GEC Marconi, GEC Marconi Australia Pty Ltd and the Commonwealth and, secondly, by the Commonwealth against BHP-IT. The various disputes raised by the parties relate, in the main, to alleged breaches of one or other of the two fixed price contracts ("the ADCNET contracts"). The matter is a complex one and its complexity has been exaggerated by the number of discrete claims made (and defences raised) both in GEC Marconi's original claim and in the cross-claims made by BHP-IT and by the Commonwealth. A further cause of complication is that, because of the back-to-back nature of the two ADCNET contracts, contractual claims arising out of one contract can have flow - on effects into the other. 7 The hearing of the matter ran over many weeks. That, coupled with the number of claims made and the time span of the events examined in the proceeding, has necessitated the preparation of reasons for judgment of no little length. I have resorted to several expedients to render as intelligible as I can the voluminous, often technical, material to which I must refer. 8 There are four schedules to these reasons. The first contains a lengthy glossary of terms, abbreviations and acronyms (of which there are many). The language of software engineers, if sometimes evocative, is not always accessible to persons otherwise reasonably competent in the English language. While several of the descriptions given are themselves contentious, I should emphasise that the descriptions are intended to be no more than aids to understanding. They do not purport to embody findings on disputed matters. The second schedule is a list of the principal actors in the events to be described in these reasons. They are identified individually by reference to the organisation or entity to which each belongs and to the respective position(s) held in that body. The third schedule reproduces a figure that described the sequence of development of the ADCNET software and the documentation that was to be produced in that process. It provides a map of sorts of the intended course of the ADCNET contracts. The final schedule contains a description of the various committees that had some part to play in the events narrated in these reasons. Some are merely in-house committees of one or other of the parties. Others are joint committees involving two or more of the parties. 9 The preparation of these schedules has been undertaken with the assistance of all of the parties for which I am grateful. While they have been included as reference aids, the reasons themselves will also contain the appropriate description of a person, acronym, committee, etc when reference is first made to that person, etc. 10 For ease in exposition I have divided these reasons into six Parts. Part I outlines the major provisions of the ADCNET contracts. It describes the principal persons and bodies who participated in the events to be considered. And it gives a brief general chronology of the circumstances giving rise to GEC Marconi's claims. Part II deals with GEC Marconi's claims against BHP-IT and BHP-IT's defences to those claims. Part III considers BHP-IT's cross-claims against GEC Marconi and the second respondent, GEC Marconi Australia Pty Ltd. Part IV deals with BHP-IT's cross-claims against the Commonwealth. Part V relates to the Commonwealth's cross-claim against BHP-IT. Part VI is a brief statement of conclusions. There is an unavoidable degree of overlap between the Parts because of the back-to-back nature of the contracts. 11 It has been necessary to reproduce a considerable body of documentary evidence in these reasons. I have not, in the main, attempted to indicate obvious errors in spelling, grammar and syntax in passages quoted. They have been reproduced as composed.
The Language and Processes of Software Development 12 It is necessary at the outset to provide some necessarily brief and superficial explanation of certain of the terms and methods employed in the ADCNET software development so as to assist understanding both of documents relied upon, and of issues raised, in this proceeding. 13 The ADCNET software was designed, developed, integrated and tested in accordance with the requirements specified by the Commonwealth in a document described as the Functional Requirements Specification ("the FRS"). The FRS was prepared by EASAMS in conjunction with the Commonwealth during a phase of the ADCNET project that led up to the execution of the ADCNET contracts of present concern. 14 The procedures to be followed and processes to be employed by EASAMS/GEC Marconi in producing the ADCNET software as a contract deliverable were detailed in what was known as the IPD Software Development Plan ("the SDP"), again a document prepared by EASAMS. Both the FRS and the SDP were amended and updated, each going through several versions. 15 The methodology employed in the development of the software in accordance with the FRS required the following steps to be taken sequentially: (i) Preliminary Design; (ii) Detailed Design; (iii) Coding and CSU Testing; (iv) CSC Testing; (v) Integration Testing; and (vi) Formal Qualification Testing. This sequence is represented diagrammatically in the figure in Schedule 3 to these reasons. Some parts of the development methodology require explanation. 16 A "CSU" was a Computer Software Unit. A "CSC" was a Computer Software Component. A CSU was the smallest element of software that could be tested. A CSC was made up of several CSUs. The purpose of CSC Testing was to test (a) the CSUs developed; (b) their integration to produce a CSC; and (c) the integration of CSCs (if necessary) to produce a "Build" for integration testing. 17 A "Build" was an installable subset of the system. "Integration Testing" was of each build using tests specified in a previously developed document, the Integration Test Description ("the ITD"), the build being tested against the software requirements specified in the Software Requirements Specification ("the SRS"). As with the FRS, the SRS was prepared by EASAMS in the earlier phase of the ADCNET project. 18 "Formal Qualification Testing" or "Acceptance Testing" was conducted to demonstrate that every testable requirement in the FRS (and supporting documents) had been met by the ADCNET software that was to be delivered under the contracts. The testable requirements of the FRS were each expressed using the mandatory word "shall". The Acceptance Tests used had to conform to the Acceptance Test Plan ("the ATP") and were to be conducted according to the Acceptance Test Description ("the ATD"), both the ATP and ATD being documents agreed with DFAT. 19 The terminology of "integration" is of importance in this proceeding. When used in relation to software development, it served two purposes. The first was to describe the process of bolting together CSUs to produce CSCs, CSCs to produce Builds, and ultimately Builds to produce the completed ADCNET software. The second was to describe one of the forms of test, ie Integration Testing, that was performed on Developed Software. The term was used as well in the ADCNET contracts to describe amongst other things the integration of the ADCNET software with hardware and software items supplied by the Commonwealth. This usage is what is described in the documentation as "integrating the System". 20 Those points at which the ADCNET software interacted with items supplied by the Commonwealth are described in the documentation as "interfaces". This again is a term that recurs in the documentation and other evidence. 21 A distinct concept of no little importance in this proceeding is that of "surface emulation". As the experts called in this matter were in agreement concerning the concept, I refer for convenience to the description given of surface (or interface) emulation by Professor Raymond Offen, a Professor of Information Technology at Macquarie University, who was called by GEC Marconi: "One commonly practiced form of emulation is interface emulation, used where one hardware/software sub-system (A), which interacts, inter alia, with another (B), needs, for whatever reason, to be fully tested before B is available. A can still be tested, before B is available, if one develops an interface emulator for B, which mimics some or all of the interactions between A and B, as defined in an interface specification, but has none of the functionality required of B itself. From A's point of view, an interface is all it ever sees of B and if this behaves correctly then A can be fully tested. For example, if A has to send a signal to B, initiating a particular B-mediated event and then pause until it receives an acknowledging signal back from B - indicating that the B-mediated event, however complex, has taken place and is satisfactorily completed - before it (A) can proceed further, all the interface emulator has to do is mimic the acknowledgment. From the point of view of testing A's functionality it is irrelevant as to whether or not the B-mediated event actually took place." 22 The term "test harness" is used in the contractual documentation in a way which is synonymous with emulation.
A THE ADCNET CONTRACTS 23 Save as to parties the Commonwealth/BHP-IT contract ("the Head Contract") and the BHP-IT/GEC Marconi contract ("the Sub-Contract") were at the time of their execution relevantly identical save where I indicate to the contrary. As the principal claims made in the proceeding relate to the latter agreement, reference here will be made to its provisions alone. As some provisions of the contract are relevant only to a particular claim I will defer detailed reference to those provisions until that claim is considered. 24 In the Sub-Contract BHP-IT was referred to as "the Customer" and GEC Marconi as "the Contractor". The contract recitals stated that: "1. The Customer wishes to procure the supply of software development services and the integration of the System in accordance with this Contract; and 2. The Contractor has agreed to supply the software development services and integrate the System in accordance with the provisions of this Contract." 25 The "System" so referred to was defined in cl 1.1 to mean "the working system which complies with this Contract and comprises the CSE and CSI". The same clause defined "CSE" to mean Contractor supplied equipment. "CSI", a subject matter important to GEC Marconi's claim, was defined to mean "the Customer supplied items to be supplied by the Customer under this Contract and referred to in clause 7". 26 Clause 7, insofar as presently relevant, imposed the obligation on the Customer to supply the CSI: cl 7.1; and then provided in cl 7.2 that: "CSI specified in Schedule 6 shall at the time of its supply by the Customer to the Contractor comply with the specifications, if any, set out in Schedule 6." Schedule 6, which was one of sixteen schedules to the contract, listed and provided for the provision of the CSI. The "Stubs devices and related equipment and software" were identified in cl 1.4(b) of the Schedule to be part of the "Test and Integration/Acceptance Test System". I would note in passing that cl 1.2 of the same Schedule provided in part that: "CSI shall include the equipment and non-Developed Software as defined in subclause 1.4 below … [s]uch equipment and non-Developed Software may be subject to change as a result of revising the Preliminary Architecture Design Document for the purposes of preparing the Final Architecture Design Document": emphasis added. Further reference will be made to the Architecture Design Document ("the ADD") below. 27 Clause 1.1 of the Contract defined "Integration" in respect of the System to include the integration services set out in Schedule 4. That Schedule listed "Contractor Supplied Services and Charges". Clause 1.1 of the Schedule provided: "The Contractor shall provide the following services. … (c) Integration of the Developed Software with the following CSI operating on Hewlett-Packard's UX BLS operating system (version 9.08) or Hewlett-Packard's UX operating system (version 9.04): … (iv) Security Equipment The Security Equipment shall consist of Stubs devices, designed and manufactured in accordance with the Stubs Requirements Specification (reference 1403.01.004)." 28 The "Developed Software" referred to in cl 1.1(c) was defined in cl 1.1 of the Contract to mean "the software that is to be developed and supplied in accordance with this Contract and includes any associated integration services". Further reference will be made to this software below. 29 Clauses 4 and 5 of the Contract stipulated particular obligations of the Contractor and Customer respectively. Clause 5 provided (inter alia): "5.1 The Customer shall take all reasonable measures to maintain the processing environment as constituted by the elements of the CSI. … 5.3 The Customer shall supply the CSI in accordance with clause 7 and shall perform its obligations specified in the Project Plan and the Implementation Plan pursuant to subclause 10.1. … 5.6 Except where otherwise provided for in the Contract, the Customer, Delegate, Project Officer and Supervisor agree that in the exercise of any obligation, function or power imposed or conferred on them under this Contract they will: (a) act in a fair and reasonable manner; and (b) act within the time prescribed under this Contract or, where no time is prescribed, within a reasonable time." 30 I would note in passing of cl 5.6, first, that all of the persons referred to there other than the Customer are defined to be officers of the Customer in cl 1.1 of the Contract; and, secondly, that the Contract did not expressly impose a like obligation on the Contractor in exercising its obligations etc under the Contract. 31 The "Project Plan" and "Implementation Plan" referred to in cl 5.3 of the Contract were each defined in cl 1.1. "Project Plan" meant the project plan set out in Schedule 7. That Schedule summarised the responsibilities of the Commonwealth, the Customer and the Contractor in Table 7.1 which itself designated the "Supply and maintenance of all hardware (including STUBS) and COTS software" to be the responsibility of the Commonwealth. I would note in passing that "COTS software" was Commercial Off The Shelf software. Clause 1.1 of the Schedule - incorrectly described as cl 2.1 in the Schedule - concluded with the observation in the BHP-IT/GEC Marconi contract (though not in the Commonwealth-BHP-IT contract) that: "Any responsibility identified in Table 7.1 as Commonwealth shall be assumed by the Customer [ie by BHP-IT]." Table 7.2 of the same Schedule provided a timetable for the delivery of CSI items. Insofar as it related to STUBS, it provided: Reference CSI Description Date required to be provided to Contractor … 3 Detailed Software Interface Specification for Stubs Untrusted Workstation/Server Software 1/12/94 Note: The Detailed Software Specification for Stubs Untrusted Workstation/Server Software shall be in accordance with the Interface Design Criteria for the Detailed Software Interface Specification for Stubs as set out in Attachment A to Schedule 7. 4 Stubs Untrusted Workstation and Server Software 01/04/95 … 10 Stubs equipment and associated software 01/08/95
It is unnecessary at this point to explain what was comprehended by the various items described in the Table. 32 Two other responsibilities of the contractor set out in the Project Plan which are of relevance were: "WP2100 Requirements and Design Maintenance Updating of the Customer's Functional Specifications, CSCI Software Requirements Specification and the Architecture Design Document to incorporate approved Contract Amendments. This work involves the preparation of the changes to the Document, internal review and approval of the changes with the Customer and the incorporation of the changes. WP4500 Development of any Test Harnesses required for CSCI and acceptance testing." 33 The "Implementation Plan" referred to in cl 5.3 of the Contract was defined to mean "the time schedule for the performance of this Contract set out in Schedule 8". Reference will be made to that Schedule in detail when considering the specific GEC Marconi claim that BHP-IT failed to pay Milestone 4000. 34 Clause 7.1 of the Contract provided that after delivery of the CSI at the times and places stated in the Project Plan: "the Contractor shall incorporate the CSI into the System or utilise the CSI in the integration of the System in accordance with the Customer's Functional Specifications." The "Customer's Functional Specifications" were defined in cl 1.1 of the Contract to mean the specifications "set out or identified in Schedule 1". That Schedule indicated that the relevant specifications were: "(a) Functional Requirements Specification (Version 3.0); (b) Preliminary Architecture Design Document (Version 1.0)." 35 The Functional Requirements Specification ("the FRS") to which it will be necessary to refer on a number of occasions in these reasons is of central importance in GEC Marconi's claim based on the non-provision of STUBS. I have referred already to the purpose of the FRS: see "The Language and Processes of Software Development". The Architecture Design Document ("the ADD") described the architecture of Release 3 of the ADCNET system. It identified the hardware and software components of the system and described how they were to be configured to meet the requirements set out in the FRS. 36 Clause 9 of the Contract dealt with "Supply and Integration of the System". Five sub-clauses require mention. They are: "9.1 The Contractor shall, if necessary with the assistance of the Customer, prepare a specification known as the Final Architecture Design Document for all parts of, and the whole of, the System before the Developed Software is supplied. 9.2 The specification referred to in subclause 9.1 shall be submitted to the Customer for review and subsequent acceptance or otherwise in accordance with the dates specified in the Implementation Plan. 9.3 The Customer's assistance in preparation of any specifications under this Contract, or giving approval of any specifications prepared by the Contractor, shall not vary or limit in any way whatsoever the Contractor's obligations under this clause or the Contract to supply the Developed Software or integrate the System in accordance with the Contract. 9.4 The System shall be integrated in stages in accordance with the Contract, including the Project Plan and the Implementation Plan. … 9.6 The Contractor shall integrate the System in accordance with the Contract Specifications." 37 Clauses 9A to 9D provided for the development, delivery and installation of the Developed Software. Reference need only be made to cl 9B and this for the purpose of indicating the documentary hierarchy it ordains. I will refer further below to the hierarchy in contractual documentation. Clause 9B provided: "The Developed Software supplied by the Contractor shall conform to: (a) the Customer's Functional Specifications [ie the FRS and the ADD]; and (b) the specifications and representations in respect thereof, including the Developed Software Detailed Design Specification, communicated specifically by the Contractor to the Customer in writing; and to the extent that there is any inconsistency between the specifications referred to in paragraph (a) and those referred to in paragraph (b), those referred to in paragraph (a) shall, to the extent of any inconsistency, be deemed to be the specifications to which the Developed Software supplied by the Contractor must conform." 38 It should be noted in passing that cl 27 of the Sub-Contract vested in the Commonwealth title to, and intellectual property rights in, the Developed Software "upon its creation". The Sub-Contract, further, obliged the Contractor to supply Services and the Developed Software which complied with the standards set out in the SDP and any subsidiary documents to it: cl 55, Schedule 3. 39 After the Developed Software had been delivered and installed on the prescribed equipment (which included the "Security Equipment": see above Schedule 4 cl 1.1), it was to undergo acceptance testing. Provision for this was made in cl 9E of the Contract. I would again note in passing that issues relating to the possible acceptance testing of the Developed Software in the absence of the STUBS devices have loomed large in this proceeding. 40 Clause 9E.0.1 provided in part: "The Acceptance Tests shall be carried out in accordance with the test cases as agreed between the Customer and the Contractor and based on the Testing and Acceptance Criteria as defined in Schedule 9. The Contractor is responsible for testing the Developed Software and those aspects of the CSI with which the Developed Software interfaces, and to reasonably demonstrate that the remaining software components of the CSI are unaffected as a result of the integration of the Developed Software with the CSI." The Acceptance Test was to be "conducted on the System" although all that the Customer would then accept from the Contractor was the Developed Software only: cl 9E.0.2. 41 The Contract, it should be noted, made express provision for what courses could be taken if during a specific Acceptance Test "a failure occurs which is due to a defect in the CSI": cl 9E.3.5A. One possible course was the Acceptance Test to be deemed to have been passed. 42 Clause 9E.5 dealt with the Acceptance Tests. It provided, in part, that: "9E.5.1 The Contractor shall prepare a Test Plan and Test Descriptions in accordance with the Testing and Acceptance Criteria as set out in Schedule 9 for approval by the Customer prior to commencement of the Acceptance Tests. … 9E.5.3 The System shall be tested in accordance with the relevant Test Plan and Test Descriptions. … 9E.5.4 The Acceptance Tests for the Developed Software shall, unless otherwise specified in the Test Plan, be carried out by the Contractor in accordance with the Project Plan, Implementation Plan and Test Plan and shall demonstrate to the Customer and the Commonwealth that the Developed Software integrated with the CSI meets the Customer's Functional Specifications." Express provision was made for what was to occur "[w]here the System [did] not meet the performance Acceptance Tests as referred to in … Schedule 9". 43 Schedule 9 was entitled "Testing and Acceptance Criteria" and it specified the criteria to be used to develop an Acceptance Test Plan ("ATP") and Test Descriptions for "acceptance of the System": cl 1.1. Clause 2.2.1, relating to Qualification Testing provided: "The qualification of the Developed Software shall be based on the adherence of the software development to the testing and quality provisions as defined in the Software Development Plan together with a series of Acceptance Tests which will demonstrate that the software complies with the Functional Requirements Specifications. These Acceptance Tests will be for specific test cases only and will be designed to show that the Developed Software complies with testable "shall" statements in the Functional Requirement Specification." 44 Acceptance Testing was thus linked directly to what were described as the "testable 'shall' statements" in the FRS. The language of the FRS in describing the individual functions specified for the System used declaratory and mandatory language: "the system shall …"; "an authorised user shall be able …"; "the interface shall …"; "validation shall"; etc. Such were the "testable shalls" that the test cases were to demonstrate could be met. It is part of GEC Marconi's case that, with the non-provision of STUBS, the testable shalls of the FRS could not all be tested fully in accordance with the Contract. 45 A provision of some importance in this proceeding is cl 11 of the Contract. It dealt with "Variations of Contract" and provided: "11.1 If either Party wishes to vary the Contract, that proposing Party shall submit a copy of the proposed variations to the other Party. The receiving Party shall advise the proposing Party within 10 normal working days, or such other period as is mutually agreed between the Parties, of receipt of the variations either: (a) that the receiving Party accepts the variations; or (b) that the receiving Party rejects the variations, and the reasons for such rejection. 11.1A Where the Customer requests the Contractor to assess the feasibility and cost of undertaking a proposed variation, the costs incurred by the Contractor in undertaking the assessment shall be paid for by the Customer in accordance with the time and materials rates as set out in Table 4.3 of Schedule 4. Where the Contactor proposes a variation the costs incurred by the Contractor in assessing the proposal shall be borne by the Contractor. 11.2 If the receiving Party accepts the variations, the Contract Specifications shall be deemed to incorporate the accepted variations from the date upon which the receiving Party notifies the proposing Party in writing that it accepts the variations. 11.3 If the receiving Party rejects the proposed variations, the Contractor and Customer shall jointly use reasonable endeavours to reach agreement on the proposed variation. Where agreement cannot be reached the Contractor shall continue to integrate the System in accordance with the unvaried Contract." I would draw particular attention in this to the structured process the clause envisaged and to the reasonable endeavours provision of cl 11.3. 46 Relatedly, cl 45 of the Contract provides: "45.1 The provisions of this Contract shall not be varied either in law or in equity except by agreement in writing signed by the Customer and the Contractor. 45.2 A waiver by either Party in respect of a breach of a provision of this Contract by the other Party shall not be deemed to be a waiver in respect of any other breach and the failure of either Party to enforce at any time any of the provisions of this Contract shall in no way be interpreted as a waiver of such provision." 47 The principal defence raised by BHP-IT to GEC Marconi's claim based on the non-provision of the STUBS devices is that the Sub-Contract was varied even if this was not done in accordance with the above provisions of the Sub-Contract. 48 The Contract made express provision for termination for default by either party. The provisions relating to termination by the Contractor were as follows: "40.8 Where the Customer is in breach of an obligation under this Contract so that there is a failure by the Customer to perform this Contract, the Contractor may, by notice in writing to the Customer, specify that breach and where that breach is capable of being remedied require the Customer within 32 days of receiving such notice to remedy that breach or commence appropriate action to remedy that breach. 40.9 Where the Customer has not: (a) remedied the breach referred to in subclause 40.8 within 32 days of receiving a notice (including because the breach was incapable of being remedied); or (b) commenced appropriate action to remedy that breach within 32 days of receiving a notice and remedied the breach within a reasonable time after that period has elapsed; the Contractor may, by notice in writing to the Customer, terminate this Contract without prejudice to any right of action or remedy which has accrued or which may accrue in favour of either Party." 49 Again I would emphasise the structured process ordained by the provision. GEC Marconi invoked this provision in terminating its contract with BHP-IT. 50 There are five clauses that individually are of significance to particular claims brought by or against GEC Marconi and of which mention should be made here. Clause 16 provided for the making of milestone payments in accordance with the payment plan provided in Schedule 8. Clause 17 required the Contractor to provide an unconditional financial undertaking from an approved guarantor. In clauses 36.1 and 36.1A each party respectively agreed to indemnify the other from designated losses. Clause 38 imposed a damages cap in respect of actions between the parties arising out of the operation of the Sub-Contract. Clause 39 was a liquidated damages clause. 51 Finally, as is apparent from the above, the contract is premised upon the existence of, or the creation of, a body of subordinate documents most being of a technical character. To obviate problems arising from inconsistency between the contract and those documents and between those documents themselves, cl 2 of the contract specified an order of documentary precedence. It was as follows: "2.1 In the event of any inconsistency between the clauses of this Contract, the Schedules to this Contract and the content of any other Document, the order of precedence shall be: (a) the Clauses of this Contract; (b) the Schedules to this Contract; and (c) the content of any other Document. 2.2 In the event of any inconsistency between: (a) the Customer's Functional Specifications [ie the FRS and the ADD]; and (b) other Contract Specifications; the Customer's Functional Specifications shall prevail to the extent of the inconsistency."
(1) The Principal Actors 52 There is a very large cast of persons and bodies who participated in the events to be narrated in this Part. It is useful to identify the principal participants at the outset. The evidence to be considered is overwhelmingly documentary. The persons to whom I wish to refer were often enough the authors of documents or of communications that are of central importance to the resolution of the issues with which I am concerned. 53 First, DFAT. The Information Technology Branch ("the ITB") of the Department had direct responsibility for the delivery and development of the Department's information technology requirements including the ADCNET project. The Commonwealth's contract with BHP-IT was managed from this branch. The project manager for the Department was Leslie George Cook ("Les Cook"). He joined DFAT in 1971 with a background in computing systems and information technology. He left the Department in 1989 but was engaged by it as a consultant, first, to assist in the definition of, and then to manage, the ADCNET project. He retained the position of project manager until 25 March 2000. 54 The head of the ITB from 1990 to 1996 was Anthony Skinner, who was an Assistant Secretary (a public service rank in the Senior Executive Service ("the SES")) in DFAT. A subordinate of his in the ITB was Robert Nichols. Mr Nichols had worked on the ADCNET project from 1989. He described himself as an assistant to Les Cook. He was not a member of the SES. 55 The ITB was one of five branches within the Corporate Services Division ("the CSD") of DFAT. The senior officer of that Division from 1993 to 1997 was Robert Cotton, a First Assistant Secretary of the Department. One of his responsibilities was the oversight of the ITB. Mr Skinner reported to him. Mr Cotton in turn reported to Clive (Kim) Jones, a Deputy Secretary of DFAT who had the general oversight of three Divisions including the CSD. 56 Secondly, BHP-IT. The company's project manager for the ADCNET contracts was Kyrill Brent. Mr Brent commenced employment with BHP-IT in July 1989 having worked in the Australian Public Service since 1966. He participated on BHP-IT's behalf in the earlier phases of the ADCNET project that commenced in 1989 and led to the 1994 contract. He ceased to work on the ADCNET contracts in May 1997. 57 During 1994 and 1995 Ian Dart was BHP-IT's National Manager for Systems Integration Services and, as such, was responsible for all systems integration including the ADCNET project. It was Mr Dart who signed the ADCNET contracts on BHP-IT's behalf. In 1996 he was appointed Group General Manager of BHP-IT. Mr Brent reported to him indirectly in this position through his own superior. 58 Thirdly, GEC Marconi. It was GEC Marconi's predecessor, EASAMS, that first participated in the ADCNET project being BHP-IT's subcontractor for the ADCNET Release 1 contract. That contract was entered into in December 1990. Its Project Director for EASAMS from 1991 to 1994 was Roger Cooke. From 1994 to 1997 Mr Cooke was Canberra Branch Manager for GEC Marconi, a position that gave him responsibility for projects being carried out in Canberra. He was EASAMS' signatory to the Sub-Contract in 1994 and to GEC Marconi's contract when the Sub-Contract contract was novated shortly thereafter. 59 The project manager for that contract from its inception was Peter Wishart. Mr Wishart had been previously employed by EASAMS and had worked on the ADCNET project from 1991 to 1993. He ceased being project manager in January/February 1996 and ceased his employment with GEC Marconi shortly thereafter. His successor was Edward Goldsmith who in turn left the project and the company in August 1996. 60 The General Manager of the division of GEC Marconi responsible for software development and systems integration in the period from September 1994 to November 1995 was Lindsay Pears. He was replaced then by Ian Sharp. As General Manager Mr Pears, then Mr Sharp, were responsible for the conduct of the ADCNET project. In October 1996 Mr Sharp became managing director of GEC Marconi. It was Mr Sharp who terminated the Sub-Contract. 61 Fourthly, the various persons - BHP-IT and GEC Marconi - who made up the actual ADCNET project team, were physically located at DFAT's Canberra office in the Administrative Building until their relocation to the Edmund Barton Building in September 1996. BHP-IT's ADCNET staff was of the order of 10 people (including Mr Brent), though some additional BHP-IT staff worked on the project under GEC Marconi's direction and control. GEC Marconi's staff was about 50 persons (including Mr Wishart and then Mr Goldsmith), though there was significant fluctuation in the numbers involved. 62 Finally, a note on nomenclature. After its takeover of EASAMS, GEC Marconi continued to trade as "EASAMS Australia". In consequence both names have been used in correspondence and in this proceeding to describe the applicant. In these reasons I will refer to the applicant as GEC Marconi save where it would be an anachronistic to do so. Quotations drawn from documents that refer to the company as EASAMS will be left in their original form. 63 To avoid possible confusion I have resorted to the expedient of referring to DFAT's Mr Cook and GEC Marconi's Mr Cooke as Les Cook and Roger Cooke respectively. This follows the course taken during the trial. 64 Distinctly, BHP-IT is commonly referred to in documents as the PSI. This is an acronym for the description "Prime Systems Integrator". This usage is retained in these reasons.
(2) A General Chronology 65 The following is a brief chronological overview of matters relevant to the GEC Marconi/BHP-IT claims and defences. It should not be taken as making, or suggesting, findings on matters that are in issue between the parties. 66 From the early 1970's DFAT embarked on the course of developing computing systems to automate many of the processes of its secure Diplomatic Communications Network. That Network at that time utilised message switching centres in Canberra, London and Washington to receive and send electronic communications to and from overseas posts and governmental agencies. In 1979 the Department commissioned its first computerised message switch system ("the IBM message switch") that had been built by IBM. 67 In 1988 DFAT commenced the ADCNET project. As conceived, its first stage involved the replacement of the existing communications network (which was used to carry formal messages, informal messages, telephone, facsimile and data transmissions) with a single network; the IBM switch was to be replaced with a new security system; and secure, modern office automation was to be provided for communications staff in overseas posts, regional offices in Australia and in Canberra. 68 DFAT invited expressions of interest for the design and development of the ADCNET project in late 1989. In March 1990 BHP-IT entered into a teaming arrangement with EASAMS and they began work together on the preparation of a joint tender in response to a Request for Tender that had been issued by DFAT. That tender, submitted around July 1990, was successful. On 13 and 14 December 1990 the Commonwealth and BHP-IT and BHP-IT and EASAMS entered into back-to-back time and materials contracts. The objects of these contracts, as recited in the latter of the two contracts, was to specify, design, develop and implement Stage 1 of ADCNET. 69 It was envisaged at the time of the contracts that BHP-IT (hence EASAMS) was to design software to meet the security baseline defined for the ADCNET system. Boundary security was, apparently, a part of that baseline. The object of boundary security was to prevent classified data being sent from ADCNET computers to less secure networks as a result of errors in the software or equipment of the ADCNET computers or of successful attacks on the ADCNET computers being made via electronic connections to less secure networks. This security was required in addition to 'need to know' security mechanisms which would control access to data stored in the ADCNET computers by persons with direct access to terminals connected to those computers. 70 The approach that was to be taken to boundary security resulted, apparently, from an agreement reached between DFAT and the Defence Signals Directorate ("DSD"), a unit within the Department of Defence ("Defence"). It required the development of a security "gateway" to allow the interconnection of networks. That gateway involved, first, the use of an encrypted seal which would be added to the document to be exported by the person who created or modified that document, and then the checking of that seal by a gateway computer before allowing the export of the document. 71 In mid-1992, DSD advised DFAT that the Defence Science and Technology Organisation ("DSTO"), another unit within Defence, had built a prototype version of what became known as the STUBS devices and that these devices were likely to offer the most secure means of providing boundary security for ADCNET. DFAT was subsequently informed that the STUBS devices were to be developed as a commercial product by AWA Defence Industries Pty Ltd ("AWADI"). It then commenced discussions with AWADI concerning the possible use of STUBS for ADCNET. BHP-IT and GEC Marconi became aware of this development in early 1993. 72 In the course of the time and materials contract, EASAMS designed and developed what became known as Release 1 of the ADCNET software. Originally intended to fall within Stage 2 of the ADCNET project, this Release was of computer software for ADCNET systems to be installed at overseas posts. This appears to have been an accelerated security measure. The process of installation abroad commenced in 1992. 73 As part of its work EASAMS also prepared design documents that were to be used in the next phase of the ADCNET project. Importantly, in conjunction with the Commonwealth, it developed the FRS, this being the document that would govern the requirements for the work to be done in that phase. 74 In 1993 discussions commenced between the Commonwealth, BHP-IT and EASAMS concerning the contractual arrangements that were to obtain for the next phase of the project. This phase involved the development of what was known as the Release 3 software and its integration with the ADCNET system. DFAT advised BHP-IT and EASAMS that the STUBS devices were the preferred choice for boundary security. The 1994 contracts were prepared on the basis the Commonwealth would supply and be responsible for the functionality of STUBS related hardware and software and that BHP-IT's (hence GEC-Marconi's) responsibility would be to integrate the STUBS devices with the Release 3 software. A schedule to the resultant contracts (Schedule 7) provided a timetable for the Commonwealth's delivery of (inter alia) STUBS related items, the first element of which was to be provided by 1 December 1994. 75 On 14 September 1994 the Commonwealth, BHP-IT and EASAMS executed the back-to-back contracts that are the subjects of this proceeding. The contract price fixed for the Head Contract was $9,609,569 and for the Sub-Contract, $6,218,260. Contemporary internal BHP-IT documentation projected a gross profit on its contract of $835,912. 76 At the time of execution of the ADCNET contracts the Commonwealth had not concluded an agreement with AWADI for the supply to it of STUBS hardware and software, though negotiations to this end were in train. On 1 December 1994 the Commonwealth failed to deliver to BHP-IT (which in turn failed to deliver to GEC Marconi) the first contractually scheduled STUBS related deliverable. This was the STUBS Software Interface Specification ("the STUBS SIS"). That document was later purchased by the Commonwealth from AWADI and supplied directly to GEC Marconi on 6 January 1995 though its adequacy was questioned thereafter. 77 On 22 December Les Cook sent a minute to Tim Harris, GEC Marconi's Systems Engineering Manager, whose principal responsibility was the integration and acceptance testing of the ADCNET software. That minute was aimed at initiating discussion on whether additional software might be provided to emulate the STUBS devices and software, the same question having previously been raised with BHP-IT. The emulation of STUBS is a matter that looms large in this proceeding. It is appropriate to indicate here that the concept of "surface emulation" has earlier been described: "Introduction: the Language and Processes of Software Development". 78 From early in the performance of the contracts GEC Marconi found itself unable to meet the contracted milestone dates for delivery of project "deliverables". It was over a month late in completing the second milestone (Milestone 2000) scheduled for 8 November 1994. By late March it was apparent to GEC Marconi that it would be four weeks late in meeting Milestone 3000 and that a project schedule slippage of 13 weeks was forecast. By late April that slippage had grown to 17 weeks. 79 DFAT had contracted to supply STUBS Untrusted Workstation and Server Software by 1 April 1995. It failed to do so. This software was in fact never supplied. By 12 April Mr Brent in correspondence was seeking Les Cook's "formal advise (sic) on the status of STUBS so that DFAT and the PSI can adopt appropriate contingency measures". 80 On 18 May Mr Brent again wrote to Les Cook that letter suggesting amongst other things that "it would be prudent to examine alternatives to STUBS". 81 As will become apparent when the circumstances giving rise to BHP-IT's cross-claims against the Commonwealth are narrated, Les Cook and the ITB had been considering from at least January 1995 what options there were should STUBS not be available. In March 1995 he prepared two option papers in which he recommended that STUBS be abandoned and that another option ("Option C") be adopted, that option having a design based on sealing and gateways as was the option suggested to Mr Cook by Mr Brent in his 18 May letter. 82 From July onwards the parties' correspondence focussed increasingly on surface emulation of the STUBS devices. This correspondence is set out in detail later in these reasons. Here it will be referred to in very general terms. 83 On 20 July 1995 Mr Brent inquired of Mr Wishart of GEC Marconi's capacity to design and develop an emulator for STUBS. Mr Wishart confirmed it possessed that capacity by letter of 3 August 1995. 84 On 25 July Les Cook wrote a letter to Mr Brent (which was forwarded to GEC Marconi on 4 August 1995) that indicated that: "it is not possible to provide sufficient STUBS devices to meet the requirements of the Acceptance Test Plan. In order to allow the testing to complete, it will be necessary to emulate the STUBS devices. A change request will be raised for this work as soon as agreement has been reached on the use of emulation and the means of achieving it." 85 It should be noted in passing that 1 August 1995 was the day on which the Commonwealth, hence BHP-IT, had contracted to provide the STUBS equipment and associated software. On 10 August and again on 24 August Les Cook wrote to Mr Brent concerning the emulation of the STUBS devices, the latter letter disputing the contention that the need to emulate STUBS would result in significant delays to the ADCNET development schedule. Both letters were forwarded to GEC Marconi the day after they were written. 86 On 6 September 1995 DFAT raised a change request (CR 3049) under its contract with BHP-IT seeking the development of STUBS emulation software. CR 3049 was forwarded to GEC Marconi on 8 September with a request for a quotation for undertaking the scoping of the change request. The emulation envisaged by CR 3049 was a full surface emulation of the STUBS devices. Less than a week later, on 13 or 14 September Mr Brent and Roger Cooke were advised by Les Cook that STUBS had been cancelled and would not be provided as CSI under the ADCNET contracts. Les Cook also made known around this time that DFAT had an alternative strategy. 87 On 26 September Les Cook wrote to Mr Brent and e-mailed Mr Wishart confirming that STUBS would not be supplied for acceptance testing. This letter is central to BHP-IT's defence of GEC Marconi's claim and is considered in detail later in these reasons. 88 On the same day DFAT raised CR 3052 to have investigated "the feasibility of the STUBS replacement strategy outlined in the attached minute". The minute referred to was a document sent by Les Cook to Mr Harris of GEC Marconi that outlined design principles for the STUBS replacement. It noted that "[b]oundary security will continue to be based on the concept of sealing and gateways". 89 Sometime in September 1995 Mr Wishart contacted a self-employed software consultant, Peter Newton, and invited him to scope an emulator for STUBS. On 3 October Mr Newton provided Mr Wishart with a preliminary paper titled "STUBS Emulation" the purpose of which was to enable Mr Wishart to consider whether the emulator Newton was proposing would meet Wishart's requirements. Two further versions of the paper were produced, one on 9 October, the other on 30 October. 90 On 5 October Mr Wishart signed GEC Marconi's quote for scoping CR 3049. It was forwarded by BHP-IT to DFAT for approval the following day. And on 11 October that approval was given and a request was made by DFAT for a quote for implementing CR 3049. On 23 October and 25 October Mr Wishart wrote separate letters each of which attached GEC Marconi's costing to implement CR 3049. It was in the order of $31,507. As will be seen, the relationship of these two letters and the status of the first is a matter in issue in this proceeding. 91 By mid-October it was apparent within GEC Marconi that the company faced a potential loss of $1 million or greater on the ADCNET contract. On 18 October Mr Pears instructed Roger Cooke to hire or contract a new project manager but to retain Mr Wishart as a Technical Manager. Pears indicated to Cooke that "[t]he bottom line is that the company is not prepared to carry a potential loss of $1M or greater". 92 On 26 October Les Cook signed the Contract Amendment to give effect to CR 3049. It was CA 23 in the Head Contract. Mr Brent signed the amendment for BHP-IT on 1 November. No like amendment was formally signed for the Sub-Contract though on 1 November Mr Brent notified Mr Wishart that formal approval had been given by DFAT for GEC Marconi to develop the STUBS emulation software. 93 In early November 1995 Mr Sharp replaced Mr Pears as GEC Marconi's General Manager. 94 On 8 November DFAT raised a further change request (CR 3057). The accompanying letter described its burden: " STUBS REPLACEMENT - CHANGE REQUEST Attached is a change request which proposes a set of changes to the FRS which will allow the replacement of the STUBS sealer and gateway devices with an approach based on the KIV-7 encryption device. Accompanying the change request form are the following documents which define the scope of the change request: a. 'STUBS Replacement - FRS Changes'; and b. 'KIV-7 Sealer/Gateway Interface Specification'." GEC Marconi was requested to provide a quotation for scoping the work required. A scoping price of $79,482.85 was later provided by GEC Marconi. 95 Throughout November both a number of further change requests were raised and proposals were made to modify contract amendment proposals, to amend documentation referenced in the contract so as to remove references to STUBS devices and software and to add references to STUBS emulation software. On 25 November Mr Harris of GEC Marconi sent an Acceptance Test Plan ("ATP") so modified to BHP-IT for approval under CR 3015. On 28 November he sent a similarly modified Architecture Design Document ("ADD") to BHP-IT for approval under CR 3060. The latter change request is of some importance in the defence raised to GEC Marconi's claim based on the non-provision of STUBS. 96 On 13 November 1995 Les Cook wrote to Mr Brent a letter addressing Mr Newton's paper on STUBS emulation. He pointed out that a number of required functions could not be tested by the emulator. Mr Wishart wrote to Mr Brent on 22 November responding specifically to the concerns so raised by Mr Cook. 97 Following a transitional period in late January and early February 1996 Ed Goldsmith replaced Mr Wishart as GEC Marconi's project manager. 98 On 6 February 1996 an invoice for developing the STUBS emulator under CR 3049 was rendered by GEC Marconi. Sometime prior to 9 February the emulation software was demonstrated by Mr Newton. On the 9th Mr Cook wrote to Mr Brent confirming that: "to the degree of detail presented, the emulation will be adequate to enable formal qualification testing of the release 3 software to be performed." BHP-IT paid the GEC Marconi invoice for CR 3049 on 19 February 1996. 99 On 6 February 1996 Roger Cooke wrote to Mr Brent concerning the next contracted milestone, Milestone 4000, which related to Test Readiness Review ("TRR"). The letter stated in part: "There is a conflict in the contract baseline documentation regarding the conduct of the Test Readiness Review. The contractual deliverable's in the document which takes precedence, namely the contract, does not provide deliverable's to enable the TRR as the SDP requires until the final milestone. We are proposing to replace the TRR milestone (Milestone 4000) with three milestones namely Milestone 4100, 4200 and 4300." The letter proposed that the contracted milestone payment be split between the three milestones proposed. 100 Mr Brent wrote to Les Cook on 9 February 1996 proposing that Milestone 4000 be split as suggested by Roger Cooke. Les Cook replied on 12 February rejecting this proposal though he agreed to participate in the documentary review required by the TRR in accordance with a revised and three-staged schedule commencing on 26 February and finishing on 2 May 1996. 101 A GEC Marconi Project Status Report of 23 February 1996 forecast a loss of $4.317 million on the ADCNET contract and a schedule slippage of up to 18 months. 102 On 23 February a meeting took place between Mr Brent and Messrs Sharp, Goldsmith and Becker of GEC Marconi. Mr Becker at that time was Commercial Manager of the Company. In a letter written to Mr Dart on 26 February, Mr Brent gave a resumé of that meeting in which GEC Marconi is said to have made the point that it perceived "that the inability of DFAT to supply STUBS as per the contract may constitute a default on the part of DFAT and BHP-IT". This was the first occasion on which this view had been communicated to BHP-IT. A further meeting between GEC Marconi, BHP-IT and DFAT was held on 29 February 1996 at which GEC Marconi put the same view to DFAT, again for the first time. 103 On 1 March Mr Goldsmith sent a facsimile to Mr Sharp in which he indicated that he had located a letter and a memorandum authored by Peter Wishart concerning testing the ADCNET software. In light of them Mr Goldsmith indicated that: "I don't think you have a viable case to say that the system won't work if it is tested against the emulator. I also don't think that you can make much of a case that DFAT can't use the system without STUBS. It is their risk." 104 On 4 March 1996 Mr Brent sent Mr Goldsmith a copy of CR 3057 together with a detailed definition of the scope of work (dated 22 November 1995) asking that he be provided with evidence of work to substantiate the funding for the CR. Mr Goldsmith replied on 8 March providing the information sought, but also indicating that GEC Marconi was "not prepared to offer a price for this CR in isolation". It wished "to offer a price recognising Customer induced delays and frustrations of the Contract". 105 A letter to Mr Brent from Mr Goldsmith of 12 March invoiced BHP-IT for Milestone 4000 in the sum of $1,250,000. The letter claimed GEC Marconi had met its obligation in relation to the TRR. On 21 March Mr Brent wrote to Mr Goldsmith refusing to authorise payment for the Milestone. He did not consider that the TRR requirements of the contract and the Software Development Plan had been met. 106 The Sub-Contract (Schedule 6) made provision for BHP-IT to supply its own personnel to GEC Marconi on a time and materials charge out rate. By early March 1996 disagreement was emerging between the parties as to the hours claimed by BHP-IT and of the time still due to GEC Marconi. By late March a dispute had arisen and on 26 March 1996 GEC Marconi rejected a BHP-IT invoice for $157,036.81 rendered on 22 March 1996. 107 On 28 March Mr Sharp wrote to BHP-IT providing GEC Marconi's response to CR 3057. It was proposed that the contract be concluded on completion and payment of Milestone 4000; that there be a 4 month time and materials contract period at the end of which a Critical Design Review would be held; and that the company would then be in a position to confirm "an appropriate arrangement for progression of the Contract to its conclusion". The letter indicated that GEC Marconi believed that "a rough order of magnitude price for completion of the Contract, as proposed, is $8,000K with completion in the latter part of 1997". This proposal was not accepted by BHP-IT. 108 On 2 April Mr Sharp wrote a letter to Mr Brent that stated, in part, that BHP-IT had overlooked that: " 1. BHP-IT is contractually obligated to supply STUBS to EASAMS. That has not occurred and, as we understand it, will never occur. BHP-IT is thus in breach of contract. Moreover, the failure to supply STUBS makes it impossible for EASAMS to complete its contract. EASAMS has done what it can do to minimise the breach. This includes emulating the AWADI STUBS interface and the submitted response to the suggestion that the STUBS be deleted from the contract and replaced by an alternative solution incorporating KIV-7. The fact remains that BHP-IT is in breach. It is now further in breach by reason of your refusal to pay the Milestone payment of $1,250,000 against Milestone 4000. If that attitude continues then EASAMS will prepare and serve a Notice of Breach." 109 On the following day (3 April 1996) a Notice of Breach was served on BHP-IT. It alleged the following breaches: "1. You have failed to provide STUBS hardware and associated documentation and software as Customer Supplied Items ("CSI") under the contract. You have failed to supply CSI in accordance with Clause 7 and have failed to perform your obligations specified in the project plan and the implementation plan pursuant to Sub-clause 10.1. 2. You have failed to pay the Milestone payment of One million two hundred and fifty thousand dollars ($1,250,000.00) pursuant to Invoice 14248 of 12 March 1996. 3. You have failed to comply with your obligations under the contract. You have failed to act in a fair and reasonable manner. Refer paragraphs 1 and 2 above. 4. You have failed to act within the time prescribed in the contract for provision of STUBS as CSI and/or failed to act within a reasonable time. 5. You have misled EASAMS in relation to the delay in supply of STUBS and inability to supply STUBS. 6. You have failed to act reasonably pursuant to Clause 9E.2.1. 7. You are in breach of Clause 16.1 in failing to make payment. Refer paragraph 2 above." The notice concluded with the following demand: "You are required in respect of that breach, where that breach is capable of remedy, to remedy that breach within thirty-two (32) days of receiving this Notice or commence appropriate action to remedy that breach." 110 The notice was forwarded by BHP-IT to DFAT on 11 April 1996 and served as BHP-IT's Notice to the Department under the Head Contract. On 17 April DFAT responded to the notice denying any alleged breach arising from the non-provision of STUBS and contending that the Contract Amendment consequent upon CR 3049 varied the contract to remove the obligation to provide STUBS CSI and, instead, to require the development of STUBS emulation software. 111 BHP-IT also responded to GEC Marconi's notice on 17 April. It later repeated its denial of any of the alleged breaches in a letter from its in-house lawyer, Margaret Beattie, to Mr Sharp on 3 May 1996. The penultimate paragraph of that letter stated: "Alternatively, if a breach has occurred (which we deny) then it does not constitute "a failure by the Customer to perform this Contract" for the purposes of clause 40.8. Alternatively, if at any stage you had a right to terminate the contract (which is denied) then you are estopped from now exercising that right or otherwise have lost those rights by virtue of without limitation your acceptance of the instructions concerning the development of STUBS emulation software and your delay." 112 On 20 May Les Cook made a presentation to BHP-IT and GEC Marconi as to how the contract could be concluded and ADCNET deployed without STUBS. The proposals envisaged the initial retention of the IBM message switch as a security device. It would be replaced progressively by a new message switch system using Release 3 software. 113 On 30 May DFAT wrote to BHP-IT indicating what it saw as BHP-IT's obligations in relation to the completion of the ADCNET contract. It went on to propose changes to specified documentation "to remove any ambiguity arising from the use of STUBS emulation". This letter was forwarded to GEC Marconi which replied to BHP-IT on 18 June. The reply stated in part: "We note it is proposed that various documentation changes be made to the contract and other documentation. This clearly is a proposal to vary the contract. We advise that we reject the proposal/variations. We are prepared to use reasonable endeavours to reach agreement. If however agreement cannot be achieved we note that pursuant to clause 11.3 of the contract, the contract will remain unvaried. Any endeavours to reach agreement are without prejudice to our rights concerning termination of the sub-contract and/or any other rights or remedies we may have." On the same day a second Notice of Breach was served on BHP-IT. It added a new breach to those specified in the first notice. This alleged a failure to pay $78,482.85 pursuant to an invoice of 8 March 1996 in respect of CR 3057. BHP-IT again denied the allegations and indicated in relation to the CR 3057 invoice that payment had in fact been made. 114 Ed Goldsmith ceased to be GEC Marconi's project manager on 30 August 1996. 115 On 24 September 1996 a third Notice of Breach was served on BHP-IT. It was similar in substance to the first although it added the additional alleged breach: "You have stated that BHP-IT (i) will not supply either STUBS or a STUBS replacement; and (ii) that BHP-IT does not have any obligation to supply same. Such statement or conduct evinces an intention on the part of BHP-IT not to be bound by the terms of the contract and as such is a repudiation of such contract." 116 On 10 December 1996, GEC Marconi served a notice of termination of the ADCNET sub-contract on BHP-IT. The Notice relied upon BHP-IT's not having remedied the alleged breaches in the three Notices of Breach (save that in relation to the CR 3057 invoice payment). 117 As part of the process of vacating the DFAT supplied premises at which it conducted its ADCNET work, GEC Marconi wrote to BHP-IT on 12 December directing that: "3. STUBS Interface Emulator files should be deleted from the system and the backups." 118 For its part, consequent upon the receipt of the Notice of Termination, BHP-IT (a) wrote a letter on 24 December 1996 to the second cross-respondent, GEC Marconi Australia Pty Ltd, calling upon a Performance Guarantee it had given on 31 October 1994 in respect of GEC Marconi's performance of the ADCNET contract; (b) treated GEC Marconi's Notice of Termination as a repudiation of the contract and it communicated to GEC Marconi its acceptance of that repudiation on 21 January 1997; (c) terminated a separate standing offer agreement it had entered into with GEC Marconi on 6 February 1995 in relation to GEC Marconi's possible provision of services to BHP-IT as a member of the Defence Preferred Systems Integrator panel; and (d) wrote three letters to Banque Nationale de Paris calling upon Unconditional Financial Undertakings given covering the payments made to GEC Marconi in respect of Milestones 1000 ($1,250,000), Milestone 2000 ($1,250,000) and Milestone 3000 ($1,375,000). 119 BHP-IT assumed the performance of the ADCNET contract in the absence of GEC Marconi. Its contract with the Commonwealth was varied on 24 December 1997. Its performance of the original and then the varied contract will be outlined later in these reasons: see below Part III: Damages: 120 The present proceeding was commenced by GEC Marconi against BHP-IT on 11 September 1997.
A GEC Marconi's Claims and BHP-IT Defences: an Overview
(1) The Primary Complaints and Defences 121 The Amended Statement of Claim particularises 14 respects in which BHP-IT is alleged to have failed or refused to comply with its contractual obligations. These 14 matters are referable to one or other of two primary complaints. The first was BHP-IT's failure to provide STUBS hardware and software as required by the Sub-Contract. The second was BHP-IT's failure to pay GEC Marconi for its achievement of Milestone 4000, again as required by the Sub-Contract. 122 Each of these failures, it is said, severally justified GEC Marconi in terminating the Sub-Contract in accordance with the provisions of cll 40.8 and 40.9 of the contract. The proper construction of those provisions is very much in issue as are the claims that BHP-IT was in breach of its contractual obligations by failing either to supply STUBS or to pay for Milestone 4000. 123 In relation to the non-provision of STUBS, BHP-IT has contended that the Sub-Contract was amended by agreement in about November 1995 to remove the obligation to provide STUBS and to substitute the use of the STUBS emulator for Acceptance Testing. Alternatively, it is said, GEC Marconi elected to affirm the Sub-Contract notwithstanding the non-provision of STUBS, or else it waived the obligation that STUBS be provided, or was estopped from asserting that STUBS was required to be provided. 124 As to the non-payment of Milestone 4000, BHP-IT asserts that GEC Marconi was not entitled to be paid as it had not complied with the requirements for payment under the Sub-Contract or else that BHP-IT had reasonable grounds for considering it had not and was in consequence contractually justified in refusing payment. Alternatively it is alleged GEC Marconi affirmed the Sub-Contract after the first Notice of Breach had been served. 125 Distinctly, BHP-IT claims that GEC Marconi was subject to an implied contractual duty to act honestly, fairly and reasonably in giving any notice of termination and it breached that duty in giving the notices. 126 In addition to its reliance upon the termination under cl 40 of the Sub-Contract, GEC Marconi alleges that BHP-IT's breaches of contract amounted to a repudiation of the contract which GEC Marconi accepted. BHP-IT's response is that if it did breach the contract as claimed, those breaches did not go the root of the Sub-Contract and did not amount to a failure to perform it. GEC Marconi was in consequence not entitled to terminate the Sub-Contract under the general law. 127 The damages GEC Marconi claims it suffered in consequence of the breaches and termination are sought to be recovered primarily on a quantum meruit claim. BHP-IT contests the availability of such a claim in the factual setting in which it has been made.
(2) The Subsidiary Complaints 128 There are four additional and discrete claims made by GEC Marconi. These are claims for loss suffered because: (i) BHP-IT wrongfully called upon the bank guarantees for $3.875M provided by GEC Marconi as security under the Sub-Contract; (ii) BHP-IT wrongfully converted the STUBS emulator after the Sub-Contract was terminated; (iii) BHP-IT repudiated the Standing Offer Agreement in respect of DPSI panel services; (iv) BHP-IT has failed or refused to pay GEC Marconi delay and prolongation costs required by the Sub-Contract. Clause 38 of the Sub-Contract imposes a cap on damages in respect of actions between the parties arising out of the operation of the Sub-Contract. BHP-IT has relied upon this provision to limit any damages recoverable by GEC Marconi to the cap of $8,600,000. For its part GEC Marconi contends that cl 38 does not apply to its quantum meruit claim. 129 The two primary complaints, the four subsidiary complaints and the damages cap defence will be considered separately and sequentially in this Part.
(3) The Non-Provision of STUBS 130 GEC Marconi's claim has a beguiling simplicity: BHP-IT was obliged to provide STUBS; it failed to do so; and that failure justified termination of the Sub-Contract both at common law and under cl 40 of the contract. The complexity in dealing with the claim arises primarily from the diverse array of defences that BHP-IT has marshalled against it. These defences have their own and different legal foundations and factual underpinnings. For ease in exposition, the course I intend to take initially is to assume that unless a defence can be made out, GEC Marconi can establish its claim. I will in consequence consider the defences first. As will become apparent, the volume of factual material virtually compels the taking of this course. 131 The principal defences raised were as follows: 1. The Sub-Contract was varied so as to remove the obligation to provide STUBS and permit the use of emulation software in its place to complete the Sub-Contract ("the Emulation Variation Agreement"). This agreement, I would note, is a composite of what in the pleadings are referred to as the STUBS Emulation Agreement and the Sub-Contract Variation Agreement. 2. GEC Marconi affirmed the Sub-Contract both after it had been notified that STUBS would not be provided and after it had served its first notice of breach ("Affirmation by Election"). 3. As a result both of representations made by GEC Marconi and relied on by BHP-IT and of the common understanding acted on by the parties, GEC Marconi was estopped from denying that BHP-IT was no longer required to provide STUBS and that GEC Marconi would no longer assert any right to require its provision ("Estoppel"). 4. In the circumstances, GEC Marconi waived or dispensed with BHP-IT's obligation to deliver STUBS and substituted for it STUBS emulation software as an alternative means of performing the contract ("Waiver"). 5. The non-provision of STUBS was not a repudiatory breach at common law or one that permitted termination under cl 40 of the Sub-Contract ("Improper Termination"). 6. When GEC Marconi terminated the Sub-Contract it was not itself ready, willing and able to perform the Sub-Contract ("Ready, Willing and Able").
(a) Additional Factual Material 132 I preface the following narrative with the observation that it has been necessary to set out in some detail the contents of a significant number of the documents that are said to bear on the issue of the alleged variation agreement. Extensive written submissions have been made analysing the burden of many of the documents to which I will refer.
(i) The ADCNET project to November 1995 133 As indicated in the "General Chronology", in 1993 the Commonwealth selected the STUBS devices as its preferred choice for boundary security and BHP-IT and EASAMS became aware of this. At the time of execution of the Head Contract and Sub-Contract the Commonwealth had not concluded an agreement with AWADI for the supply to it of STUBS hardware and software, though negotiations to this end were in train. BHP-IT concedes it was aware of this when it signed both contracts. 134 From early in the life of the ADCNET contracts all parties were aware of the possibility that it might be necessary to resort to emulation of the STUBS devices for some purposes at least. In a "Pre-Review Check Sheet" prepared by GEC Marconi on 18 November 1994 for the projected Preliminary Design Review ("PDR") of 23 November 1994 a major defect identified in the Acceptance Test Plan (a document to be approved at the PDR) was described in the following fashion: "The ATP specifies some 25 STUBS devices to be provided (19 for Phase A and 6 for Phase B). The contract provides for the delivery of a small number of Stubs devices (2 sealers, 1 KDC and 1 gateway) to be installed by 1/8/95 - i.e. some time after the commencement of Phase A testing. Present indications from AWADI are that, at best, a prototype system could be installed by 1/8/95. Production units would not start to be delivered until January 1996. The ATP should be amended accordingly. This means that it may be necessary to emulate the sealing of documents during performance testing in Phase A." 135 On 22 December 1994 Les Cook wrote directly to Mr Harris of GEC Marconi on the subject of "Emulation of STUBS Devices". The letter contained a handwritten notation from Les Cook that stated: "This is to initiate discussion of practicality at this stage". The letter itself indicated that the supply of STUBS equipment and software was "likely to be too late to allow testing and integration of PSI software without some form of emulation". The emulation envisaged was such as to ensure that "all PSI software (other than emulation) operates unchanged whether STUBS is emulated or not". I would note in passing that a modified version of this letter was revived by Mr Cook in July 1995 by which time the emulation of STUBS was a live issue. 136 The Acceptance Test Plan, that was approved on the completion of PDR (which seems to have occurred in mid-January 1995), provided that (cl 3.3.3.4.1.1.1): "The availability of Stub devices during the Acceptance testing is likely to be limited and will not be sufficient for the Minimal Message Switch to support the Acceptance Tests. The use of simulators and/or interface stubs and any test waivers related to the Stub device will be resolved by agreement between the Customer and the Contractor." 137 On 20 February a Project Management Committee meeting was held that was attended by, amongst others Les Cook, Mr Brent and Mr Wishart. Mr Wishart produced a report of that meeting on the same day. It noted: "10. DFAT getting even more concerned with STUBS. Very high possibility that STUBS will not be available in any quantities for testing. Some possibility that STUBS may never be available. LGC [Les Cook] considering other options, will keep us informally advised and raise CR's for any work to build emulators or (worst case) rework of security policy." 138 By this time a default had already occurred under the contracts in relation to the delivery of STUBS related items. The STUBS Software Interface Specification ("the STUBS SIS") was required to be delivered on 1 December 1994. Delivery occurred on 6 January 1995 but was alleged by GEC Marconi to be deficient in some respects. The STUBS untrusted workstation and server software in turn was scheduled for delivery on 1 April 1995. It was never delivered. Delay in its delivery was foreshadowed by Les Cook as early as 19 December 1994. 139 The issue of the possible emulation of STUBS was again raised at a Project Management committee meeting of 29 March 1995. Mr Wishart's notes of that meeting recorded: "DFAT may raise a CR to conduct acceptance tests without STUBS devices. DFAT to make a judgment on whether STUBS is in the project or not within next 4 weeks." 140 On 26 April an internal memorandum of GEC Marconi prepared by Mr Pears recorded a meeting with Mr Dart of BHP-IT concerning ADCNET. It recorded in part: "1. … Broke the news that we could be up to 17 weeks late as a result of under estimation of Code & Unit Test (CUT) phase. … 4. It is highly likely that the customer will be unable to deliver a key piece of CFI/CFE, the AWADI STUBBS device. We will then be in a position to remove LD's [liquidated damages] by negotiation of the scope of ensuing delay. We should know by June/July, and resolve by October." 141 Earlier, on 12 April, Mr Brent wrote a letter to Les Cook that concluded with a request for his "formal advise (sic) on the status of STUBS so that DFAT and the PSI can adopt appropriate contingency measures". Mr Brent's concern with STUBS was reiterated in a letter of 18 May 1995. It warrants quotation in full (omitting formal parts). I should preface this by noting that the reference in it to HPUXBLS is a reference to the "Hewlett Packard Unix 'B' Level Secure Operating System". The letter stated: " RE: STUBS During the course of recent project management meetings there has been a lot of discussion concerning the status of STUBS. The situation in brief is as detailed below: · STUBS Software Interface Specification is delayed 4 months; · STUBS delivery is likely to be delayed; · STUBS may not be delivered at all; · the Department does not have a contract for the delivery of STUBS; · high level discussions between AWA, DFAT, Defence are imminent and will decide the outcome. This may well be that the STUBS program is cancelled within AWA. The impact of these developments on the PSI has been that: · all work on STUBS-related design has been halted due to a four month delay in the supply of the software interface specification; · the uncertainty associated with STUBS has thrown into doubt the viability of the entire system; · if STUBS is not available then the current ADCNET architecture and the associated design are invalid. In the light of the position described above it would be prudent to examine alternatives to the use of STUBS. Suggested options are: · implement the necessary boundary security functions in software on HPUXBLS and seek appropriate waivers from DSD concerning accreditation for the system; · conduct an international technology search/review in order to identify device(s) which could conceivably meet ADCNET objectives/needs; · explore the options for the design and implementation of an alternative security architecture. Whatever the outcome of STUBS availability we need to move quickly on all fronts in order to contain significant and costly delays to the ADCNET program. In the context of the current position I request an urgent and extensive conference between the Department and the PSI concerning this issue." 142 Les Cook was overseas at the time of this letter, returning on 28 May. He did not reply to it until 6 June, his reply indicating: " STUBS As you have noted, there is great uncertainty surrounding the supply of STUBS to the Department in time for the deployment of ADCNET Release 3 in Canberra. The Department's Executive are schedule to meet within the next 10 days to determine whether to proceed with STUBS or to accept an alternative method of providing ADCNET boundary security. I agree with your analysis of the broad options available. Of these, I have advised the Department's management that only the first is a practical option. The reasons for this are noted below." After outlining the proposal that had been put to the DFAT executive, the letter concluded: "DSD is in the process of commenting on the proposal and the Department intends to make a decision on the use of STUBS or this approach within the next two weeks. I will, of course, inform the PSI as soon as such a decision is reached. In the meantime, I have recently sent a copy of the outline design proposal to you and I would welcome comments on it." 143 As was noted in the "General Chronology", it will become apparent when the circumstances giving rise to BHP-IT's cross-claims against the Commonwealth are narrated that Les Cook and the ITB had been considering from at least January 1995 what options there were should STUBS not be available. In March 1995 Mr Cook prepared two option papers in which he recommended that STUBS be abandoned and that another option ("Option C") be recommended, that option having a design based on sealing and gateways as was the HPUXBLS option suggested to Mr Cook by Mr Brent in his 18 May letter. 144 By July 1995 neither BHP-IT nor GEC Marconi had been informed by DFAT whether or not it was proceeding with STUBS. A meeting of the Acceptance Test Team (involving DFAT and BHP-IT representatives) occurred on 7 July 1995, the minutes of that meeting noting, inter alia, that: "3.1.5Action:There are a number of issues with the connection of External Partitions to the test system given the lack of STUBS. Status:PSI is still unaware of DFAT official position on STUBS. RN to provide PSI with advice in relation to the go ahead with the emulation of STUBS for testing. R Nichols to speak to L Cook regarding contract variations and will then advise." These minutes were copied to Mr Wishart and Mr Harris of GEC Marconi. 145 GEC Marconi's risk analysis report of 19 July - such a document was prepared almost monthly under the direction of Mr Wishart - dealt with STUBS in the following manner: "Ref: 14 Title: STUBS Availability date and numbers Description: The earliest available date for the STUBS device and the number of devices available on that date may present some problems for the development and testing efforts. RAP Details: DFAT/BHP to advice [sic] Status: MEDIUM risk" 146 Mr Brent wrote to Mr Wishart on 20 July 1995 seeking information on a variety of STUBS related matters. Two of these were (i) the impact on the formal test program if STUBS was not available and (ii) GEC Marconi's capacity to design and develop test harnesses simulating STUBS. In cross-examination and again in re-examination Mr Wishart confirmed that he understood the second query to relate to the development of an emulator that would enable the acceptance testing of the ADCNET system. His letter in response of 3 August indicated in relation to these two matters, first, that GEC Marconi would not accept responsibility for any issues identified with STUBS during formal acceptance testing if STUBS was not available for integration and system testing; and, secondly, that GEC Marconi had the capabilities to design and develop test harnesses for STUBS. 147 On 25 July Les Cook wrote to Mr Brent raising the issue of a change request to allow emulation of the STUBS devices. That letter was an adaptation of the letter sent to Mr Harris on 22 December 1994 to which reference has been made above. Insofar as presently relevant it stated: " SUPPLY OF STUBS DEVICES FOR ACCEPTANCE TESTS 1. As previously stated in meetings, it is not possible to provide sufficient STUBS devices to meet the requirements of the Acceptance Test Plan. In order to allow the testing to complete, it will be necessary to emulate the STUBS devices. A change request will be raised for this work as soon as agreement has been reached on the use of emulation and the means of achieving it. … 4. It is proposed that all STUBS sealers and gateways required by the Acceptance Test Plan be emulated. Some of the untrusted software will also be emulated. 5. The emulation should ensure that, to the degree possible, all PSI software (other than that which provides the emulation) operates unchanged whether STUBS is emulated or not. … 6. The emulation should allow all cases of success or failure of STUBS functions to be tested, in so far as they are relevant to PSI software, without requiring changes to PSI software. It should include the creation of audit log information as defined in the STUBS SIS." 148 Mr Brent forwarded this letter to Mr Wishart on 4 August 1995, his own letter indicating that: "I would appreciate your advice on the issues raised with specific reference to:
Development of STUBS emulation software for the Department of Foreign Affairs and Trade.
PRICING: This amendment has no impact on the firm price.
Firm Price: $40,029 which remains firm for 14 days from the date submitted.
Payment Plan: This amendment has no impact on the payment plan.
Schedule Impact/Comments (performance/architectural/PDR/CDR/etc):
The scope of work has an impact of 5 day impact to the Release 3 Schedule.
AUTHORISATION: *Contractor: [K Brent] 1/11/95 ADCNET Project Director for BHP Information Technology Pty Ltd *Customer: [L Cook] 26/10/95 ADCNET Project Manager for Department of Foreign Affairs & Trade *Note: Signature by both parties constitutes an amendment to the Contract.
The internal contradictions in this document as to whether it varied the contract were a matter of submission. 179 On 1 November Mr Brent wrote to Mr Wishart indicating that DFAT had given approval for GEC Marconi to develop the STUBS emulation software and BHP-IT agreed the quotation for $31,507.06 to undertake the work. Mr Brent did not, though, prepare a formal Contract Amendment document for the Sub-Contract corresponding to CA23. He was not able to explain in evidence why he did not. I would note in passing that it is BHP-IT's submission, denied by GEC Marconi, that it is clear from the documentary evidence that by November 1995 all of the parties, including GEC Marconi, objectively intended and agreed: (1) to remove the obligation upon BHP-IT and the Commonwealth to deliver STUBS and correspondingly to remove the obligation upon GEC Marconi and BHP-IT to integrate STUBS into ADCNET; and (2) to use an emulator to be constructed by GEC Marconi in performing the contracts, and in carrying out acceptance testing, so as to allow completion of the contracts. 180 BHP-IT goes on to submit that the alleged contract variation to the Sub-Contract for which it contends was manifest in later actions of the parties after 1 November. Before turning to those actions it is convenient to refer to the evidence on the relationship of the 23 and 25 October letters.
(ii) The 23 and 25 October letters 181 My concern for the moment is not with the ultimate effect to be given the two letters as such. It is with the evidence concerning their relationship. 182 I have referred above to the contents of the two letters and to the minutes of the GEC Marconi Project Management team meeting which recorded a call from Mr Brent concerning delay claims for STUBS. 183 In their Witness Statements both Roger Cooke and Mr Wishart recount a conversation between them, said to have been initiated by Mr Cooke in which he indicated that the 23 October letter could be misinterpreted as it could be read to suggest that emulation would cure future delays. Mr Wishart in turn stated he would go to Kyrill Brent and recover the letter. 184 In his oral evidence Roger Cooke indicated that while his witness statement referred only to his objection to the issue of delay claims, he objected to the entire letter. He acknowledged that he was aware that one of the central issues in this proceeding was whether the emulation software was to be used for development, integration and acceptance of the ADCNET system but that nowhere in his statements did he record his objection to that part of Mr Wishart's 16 October memorandum to Mr Breden or to the 23 October letter which said the emulation software would be so used. He equally accepted that there was no contemporary GEC Marconi document that recorded such an objection. 185 Mr Wishart's oral evidence confirmed that of his Witness Statement that he saw Mr Brent and indicated he wanted it back. He said Mr Brent expressed surprise at the language of the letter. Mr Wishart did accept that it was possible the letter was not given back. From discovery in this proceeding it is clear that the original of the letter of 23 October as also that of 25 October remained with BHP-IT on its Change Request file. However a copy of only the latter letter was on BHP-IT's Correspondence file. 186 Mr Brent, while denying the occurrence of any meeting and conversation concerning the return of the letter, conceded he had no recollection whether or not the claimed meeting occurred. 187 Finally Mr Wishart accepted in oral evidence that the second paragraph of the 23 October letter concerning the use to be made of the software reflected what he thought was his understanding at the time and that this was that the emulator would allow completion of acceptance testing of the ADCNET Release 3 software. He had no recollection of what he was trying to convey in the third paragraph of that letter. 188 As I will indicate below, GEC Marconi's contention is that the 25 October letter superseded the 23 October letter so withdrawing any offer, or nullifying any representation made, in the earlier letter. BHP-IT and the Commonwealth contend that the purpose of the 25 October letter, having regard to the events giving rise to it, was to withdraw that part of the 23 October letter contained in its third paragraph that related to delay costs. (iii) From November 1995 189 By 4 November 1995 DFAT had prepared in draft form a document entitled "KIV-7 Sealer/Gateway Interface Specification". On 8 November Les Cook sent CR3057 to Mr Brent. The accompanying letter stated in part: " STUBS REPLACEMENT - CHANGE REQUEST Attached is a change request which proposes a set of changes to the FRS which will allow the replacement of the STUBS sealer and gateway devices with an approach based on the KIV-7 encryption device. Accompanying the change request form are the following documents which define the scope of the change request: a. 'STUBS Replacement - FRS Changes'; and b. 'KIV-7 Sealer/Gateway Interface Specification' Please note that the latter document is a draft at this stage as development is continuing to prove that the interfaces to the KIV-7 behave as described … Also accompanying the change request are the following documents which are not a party of the change request but contain explanatory material which may assist the PSI in determining the extent of the proposed changes and the reasoning behind them: a. 'STUBS Replacement - Design Principles'; b. 'STUBS Replacement - Encryption Device Performance'; c. 'STUBS Replacement - Routing Principles and Examples'. The first of these is is (sic) a reply to your letter KB-752 which was a critique of the original draft proposal." The change request was forwarded to Mr Wishart seeking a quotation for undertaking the scope of work. That quotation ($79,482.85) was provided on 27 November together with an outline of the scope of work. That outline disclosed it was based on the following assumptions: "i That the CR will be approved by end Feb 1996. … … iii KIV-7 devices will be treated as CSI. iv Hardware changes to the Test and Integration Facility (TIF) to install KIV-7 devices and make them operational in the agreed reconfigurations will not be the responsibility of EASAMS. Software configuration of the TIF (except KIV-7 devices) will be the responsibility of EASAMS." Emphasis added. Approval for the scoping was given by Les Cook on 7 December 1995. 190 Returning to November, the issue of delay claims and contract schedule extension again became a subject of correspondence in early November. On 10 November Mr Brent wrote to Mr Sharp of GEC Marconi seeking his support and cooperation in progressing certain matters "to a successful conclusion". These were described as follows: . our client the Department of Foreign Affairs and Trade has issued a detailed specification for changes to the ADCNET Functional Requirements Specification and subsequent development and implementation of an alternative to the STUBS device. This specification was referred to EASAMS for scoping under cover of change request 3057 dated 8 November, 1995; . our formal proposal to the Department for contract amendment and schedule extension included the development of a STUBS emulator but did not include the development of a STUBS alternative: Thus CR3057 constitutes an additional scope of work; . the Department has indicated that in order to give our proposal for contract amendment favourable consideration a priced quotation for the implementation of CR3057 is required. This task needs to be completed quickly to facilitate the passage of our proposal and the establishment of a new contract baseline; . in order to substantiate our proposal for contract amendment and schedule extension BHP IT and the Department require a revised schedule to be submitted for detailed analysis and ratification. … I am concerned that some of these matters have been outstanding for some time without resolution. In my view we have an excellent opportunity to "reset" the project baseline. I would not wish to see this opportunity forgone." 191 To again anticipate matters, discussions took place between Mr Brent and Les Cook concerning delays occasioned by STUBS and otherwise. On 1 December Mr Brent wrote to Les Cook proposing extensions to the Contract Acceptance Date for (inter alia) the Canberra System. Les Cook replied on 5 December. The letter stated: " PROJECT DELAYS The Department is not prepared to agree to an extension of the project schedule outside the contract mechanisms of change requests and claims for excusable delay, except in the case of a comprehensive agreement including the settling of all outstanding diarised incidents and the change requests relating to STUBS replacement, Xerox batch printers and the use of Applixware version 3.2 for HP/UX BLS. As you have noted, there is a possibility that the contracted date for delivery of the Canberra software, after adjustment for currently approved change requests, will be reached before agreement is achieved. This would mean that the PSI had technically defaulted in the terms of the contract and that liquidated damages would commence. I note that the PSI is probably already in default of the contract, having failed to meet the contracted date for milestone 4000 even if the most generous view of possible claims for excusable delay is taken. We believe that, provided that scoping of the referenced change requests is performed promptly, it should be possible to reach agreement before liquidated damages become payable. If it becomes likely that this will not be achieved, the Department will consider individual claims for excusable delay where these have been diarised and are reasonable within the requirements of the contract. It is not the Department's intention to require liquidated damages to be paid if a comprehensive agreement on changes to the contract schedule is close to achievement. The Department is prepared to accept that a comprehensive agreement will nullify any liability for liquidated damages which would, under the terms of the existing contract, become due before the date of the agreement, provided that this occurs before 1 March 1996. If no agreement has been reached by 1 March 1996, the contract will be unchanged and liquidated damages will be payable from the contracted dates of milestones 5000 and 6000, modified by approved change requests and agreed delay claims." 192 Again to return to November, on 13 November Les Cook responded to a BHP-IT letter of 16 October which enclosed a copy for comment of Mr Newton's revised interface specifications for the STUBS emulator. This response post-dated the agreement on CR3049. Nonetheless Les Cook commented that the proposed interface design was sound in concept but had been simplified to the point at which some required functions could not be tested. These included five matters to which he referred specifically. The response went on to indicate: "Although it has been agreed that it is no longer necessary to emulate STUBS-specific actions such as particular audit messages, it is important that all functionality included in the ADCNET software can be tested. It was for this reason that DFAT agreed to the cost of the emulation change request, which was greater than had been proposed by the PSI for a full scale emulation of the STUBS software interface specification." 193 The letter was forwarded to Peter Wishart for comment. In his oral evidence he accepted that it was apparent from Mr Cook's letter that what was wanted was an emulator that would enable completion of the ADCNET contract. In his reply of 22 November 1995 Mr Wishart commented that: "The cutdown STUBS emulator was intended to provide a mechanism to exercise all paths through the IPD code which could be affected by the STUBS device. While this is being done mostly in the STUBS emulator, some components are more effectively implemented by changes directly to the IPD code." He then replied specifically to the individual matters raised by Les Cook, and concluded: "I believe that this addresses all the issues raised in the correspondence": emphasis added. In cross-examination directed at the first of the above-quoted sentences Mr Wishart accepted that the "exercising" process for which the emulator was to be used would permit the Release 3 software to be "ultimately acceptance tested". 194 I earlier indicated that Mr Newton's evidence is that he did not see the 13 November comments of Les Cook. He likewise did not see, or speak to Mr Wishart about, the contents of 22 November reply. He nonetheless indicated in evidence that Mr Wishart's replies could have been based on the Newton paper of 30 October and that those replies did not seem to require any additional knowledge or discussion. 195 I would also note in passing that BHP-IT and the Commonwealth contend, but GEC Marconi denies, that the above Cook-Wishart correspondence provides written confirmation of the Emulation Variation Agreement. 196 In December 1995 and January 1996 first the Commonwealth and then GEC Marconi agreed a contract amendment to the Head Contract (CA45) and to the Sub-Contract (CA30). The amendment incorporated changes to Schedule 8 of the two Contracts to reflect an extension of time to complete the work approved in twenty-eight change requests one of which was CR3049. 197 In GEC Marconi's risk analysis report of 14 December 1995 the following was recorded: "Ref: 13 Title: STUBS Availability date and numbers Description: The earliest available date for the STUBS device and the number of devices available on that date may present some problems for the development and testing efforts. RAP Details: STUBS devices will not be available in time. DFAT proposing use of a STUBS emulator to be constructed by the PSI and used for acceptance. STUBS devices is (sic) not being used on ADCNET. Status: CLOSED." 198 As indicated in PART I, "The ADCNET Contracts", the Architecture Design Document ("the ADD") described the architecture of Release 3 of the ADCNET system. It identified the hardware and software components of the system and described how they were to be configured to meet the requirements of the FRS. The ADD was prepared by GEC Marconi and was deliverable under the Sub-Contract. Along with the FRS, the ADD was one of the designated "Customer's Functional Specifications" in Schedule 1 of the Sub-Contract. One of GEC Marconi's contractual obligations was to update the ADD to incorporate approved contract amendments to the Sub-Contract: Schedule 7, cl 2.2, WP2100. 199 Mr Harris, as GEC Marconi's Systems Engineering Manager, was responsible for updating the ADD. Consequent upon the abandonment of the STUBS devices, Mr Harris made a number of amendments to the ADD in November 1995 which were forwarded to Mr Brent in CR3060 on 28 November. The accompanying letter he wrote stated, in part, that: "The Attached CR is for changes to the Architecture Design Document. It has been updated to include the current definition of logical servers and mapping of these to CSC's. It has reference to STUBS KDC devices, Sealer Workstations etc. removed or replaced by STUBS emulation software." Paragraph 1.2 ("System Overview") in its unamended form provided, insofar as relevant, that: "Additional security specific software will provided (sic) as per COTS Software. This functionality will include: . STUBS sealer and Gateway (Hardware and Software)." Mr Harris' proposed amendment read: "Additional emulation of security specific software will provided (sic) to emulate COTS Software. This functionality will include: . STUBS sealer emulation and STUBS Gateway emulation (Hardware and Software)." Some number of other STUBS related amendments was also made to the ADD though some references to STUBS devices remained, as also did a reference to "trusted import/export gateway". 200 CR3060 was approved in turn by BHP-IT and by Les Cook and resulted in Contract Amendment 31 (CA31) to the Sub-Contract (signed 19 December 1995) and CA42 to the Head Contract. The relevant contract amendment instructions in each case were: "Architecture Design Document Replace the amended pages of the Architecture Design Document (ADD), Version 2.0 with the new pages. When completed, the Architecture Design Document becomes Version 2.1. Release 3 Contract The Contract should be amended to refer to the Architecture Design Document as Version 2.1 (Schedule 1 in the Contract)." 201 Schedule 9 of the Sub-Contract specified the criteria to be used to develop an Acceptance Test Plan ("the ATP"). The ATP was to be used to show that the Developed Software complied with the "testable shalls" of the FRS. It was again Mr Harris who was responsible for developing and maintaining the ATP. 202 On 9 November 1995 Les Cook wrote to Mr Brent indicating that a current contract amendment proposal was by then out of date given "recent decisions to [inter alia] replace STUBS". That contract amendment related to the ATP. Mr Cook now proposed changes which included: "b) delete references to Stubs devices, Stubs workstations and Stubs software from the CSI List in Appendix C. c) add references to Stubs emulation software where appropriate." The letter concluded with the observation that "[o]nce agreement on the STUBS replacement has been reached, further changes to the ATP will be necessary". 203 Mr Cook's letter was forwarded by Mr Brent to Mr Wishart on 13 November under the heading CR3015. Mr Harris responded to Mr Brent that the changes to the ATP had been made as requested. The documentation was then sent to Les Cook for approval. By this time, though, Les Cook was proposing that the contract amendment be delayed to reflect change to the ATP which would be necessary following the approval of contract amendments for (amongst others) "the replacement of Stubs": letter to Mr Brent of 30 November 1995. He nonetheless proposed the making of further amendments to the ATP. 204 On 18 December Mr Cook's letter was forwarded to Mr Wishart by Mr Brent, who asked that Mr Cook's requested amendments to the ATP be made. Mr Wishart made a notation on that letter which he copied to Mr Harris which included: "I do not want to wait for the other issues to be resolved before accepting this CR. I propose to flag delays to TRR until this is resolved." 205 The amended ATP was sent to Mr Brent on 7 February 1996 under cover of a letter from Mr Goldsmith who had replaced Mr Wishart as GEC Marconi's project manager. The letter, insofar as presently relevant, stated that the changes incorporated into the new version of the ATP included: "Removed STUBS Sealers, STUBS Devices, KDC workstations, STUBS Audit workstations and STUBS conversion. STUBS Gateway workstations remain. STUBS conversion software changed to STUBS emulation software." It went on to reject as "not practical" Les Cook's proposal to delay the contract amendment until the details of (inter alia) the STUBS replacement CR was finalised. 206 It was Mr Harris' evidence in his Witness Statement that though he made the amendments to the ATP it was not his understanding then that the emulation software proposed would enable Formal Qualification Testing ("FQT") without the FRS being amended. 207 The amended ATP was approved by the Commonwealth on 6 March 1996 subject to two minor amendments for which its further approval was not needed. Mr Brent forwarded CR3015 to Mr Goldsmith for signature on 8 March 1996. This was never signed by GEC Marconi. 208 On 23 February GEC Marconi intimated to BHP-IT for the first time that the inability of DFAT to supply STUBS might constitute a default on the part of DFAT and BHP-IT. This view was reiterated at a tri-partite meeting of the parties on 29 February 1996. 209 The first notice of default was served on 3 April. 210 There is an additional piece of evidence to which reference should be made. It relates to KIV-7 and I wish briefly to refer to certain of the oral evidence that touched upon it. Mr Wishart in cross-examination did not agree with the proposition that the agreement entered into in relation to CR3049 was to enable the ADCNET contracts to be completed within a reasonable time. He described his own state of mind on the matter to be: "I believe that the STUBS cutdown emulator agreement was dependent upon reaching agreement on the alternative STUBS strategy. So in my view in agreeing to the STUBS emulator I was aware that we had to have a replacement for STUBS strategy and that there was a CR forthcoming in that area." Les Cook's evidence in cross-examination was that, when STUBS was known to be unavailable, the best option DFAT had was KIV-7 though it required further investigation.
(b) Relevant Sub-Contract Provisions 211 In the description of "The ADCNET Contracts" in Part I of these reasons I referred to those provisions of the Sub-Contract and the related contractual documentation that have some bearing on the question whether the alleged Emulation Variation Agreement was entered into by BHP-IT and GEC Marconi. Those provisions are (i) cl 45 of the Sub-Contract which required any variation to be in writing; (ii) cl 11 that stipulated the procedure to be followed in effecting a variation; (iii) cl 1.2 of Schedule 6 to the Sub-Contract which envisaged the possibility of change to CSI to be provided by BHP-IT (including the STUBS devices) as a result of revision of the ADD; and (iv) cl 2.2 of Schedule 7 which included within GEC Marconi's project management function the development of test harnesses for CSCI and acceptance testing. Additionally cl 2.2.4.1 of Schedule 9 required that a test harness be used for Interface Acceptance Testing where operational equipment was not available. For present purposes I need only indicate that a "test harness" is a type of emulation usually taking the form of emulation software. 212 Both the relevance and the proper interpretation or effect of the above provisions are contested by the parties. These are matters considered below in "Applicable Principles" and in "Submissions and Conclusions".
(i) Was writing a prerequisite? 213 Clause 45 of the Sub-Contract required any contractual variation to be in writing. BHP-IT's primary case is that the Emulation Variation Agreement was in writing. It claims in the alternative, though, that cl 45 does not preclude the making of an oral or implied contract, or else, if the requirements of cl 45 were required to be but were not satisfied, the parties by their conduct clearly intended to waive formal requirements. GEC Marconi's contention is that, as the variation was not in writing, the alleged variation was ineffective. Compliance with cl 45 was mandatory. As to the alleged waiver, it is contended, that it was not open to BHP-IT to make this submission as it did not plead waiver of cl 45. 214 The pleading point apart, the submissions raise the question whether the legal effect of cl 45 was to render ineffective any subsequent implied or oral contract the purport or effect of which was to vary the Sub-Contract? 215 That question must, in my view, be answered in the negative for reasons of principle and of authority. 216 (1) While there is a voluminous case law concerned with the consequences that can flow from non-compliance with formal requirements imposed by statute, as for example the Statute of Frauds and its offsprings: see Phillips v Ellison Brothers Pty Ltd (1941) 65 CLR 221 at 243-244; Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 112-113, 122-124; Pavey & Matthews Pty Ltd v Paul (1986) 162 CLR 221; Trimis v Mina [1999] NSWCA 140; it has no bearing on the present question which involves the legal effect to be given to self-imposed, not externally imposed (ie imposed by law), formal requirements. Further, the consequences of non-compliance with statutory requirements fall to be determined under the shadow of the legislative purpose of the particular statutes in which they may be found: cf Chitty on Contracts, vol 1, para 4-003 (28th ed). 217 (2) The principal cases in this country dealing with non-compliance with contractually imposed written modification clauses are those dealing with claims to be paid for extra work or services rendered under contracts which require written orders or written agreements for such works or services: Liebe v Molloy (1906) 4 CLR 347; see generally, Halsbury's Laws of Australia, vol 3(2), 65-1145. The conclusions to be drawn from the cases in this category are that (i) notwithstanding the writing requirement, it is open to the parties by express oral agreement or by contract implied from conduct to impose further or different rights and obligations on each other from those contained in the original contract: Liebe v Molloy, above at 353-355; Commonwealth of Australia v Crothall Hospital Services (Aust) Ltd (1981) 36 ALR 567 at 576ff; or (ii) that one party may so induce or encourage the other's assumption on which it relies that the relevant formal requirements need not be complied with, as to be estopped from later setting up those requirements: Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251. The relevant principle, for present purposes, was stated concisely by Ellicott J in the Crothall Hospital case in the following terms (at 576): "It is open to the parties to a written contract to vary it. This may be done in writing or, except where the contract is required by law to be evidenced in writing, by oral agreement. The agreement to vary may be express or implied from conduct." Emphasis added. The common, often fatal, difficulty experienced by a party in seeking to make out a contract to vary has been the evidentiary one of proof of the contract itself: see Liebe v Malloy, above; Trimis v Mina, above at [64]. 218 (3) For an alleged subsequent variation to be contractually effective notwithstanding non-compliance with the written modification requirement, it must itself otherwise satisfy the requirements of a valid contract, ie "the terms of the arrangement must be certain, and … there must generally be real consideration for the agreement": Ermogenous v Greek Orthodox Community of SA Inc (2002) 187 ALR 92 at 99; and see below, "Formation of a contract of variation". 219 (4) Internationally, the law varies widely as to the efficacy of what are commonly described as "no oral modification" clauses (a description I will use hereafter). The common law rule in the United States has traditionally denied effect to such clauses: eg Bartlett v Stanchfield 19 NE 549 (1889); Farnsworth, Contracts, s7.6 (3rd ed). As Cardozo J observed in Beatty v Guggenheim Exploration Co 122 NE 378 (1919): "Whenever two men contract, no limitation self-imposed can destroy their power to contract again". Article 2-209(2) of the Uniform Commercial Code, in contrast, gives mandatory effect to a writing requirement for modification: see White and Summers, Uniform Commercial Code, vol 1, s1-6 (4th ed, 2000 reprint); see also Unidroit, Principles of International Commercial Contracts, Art 2.18. In the European Union, there are countries that give only evidential value to a no oral modification clause, while in others such clauses are enforced: see Lando and Beale, Principles of European Contract Law, Art 2:106, where the respective positions in the countries of the European Union are described. 220 (5) The usual objection raised to depriving a no oral modification clause of legal effect is that it involves a failure to give effect to what the parties have agreed. In the present case GEC Marconi has raised just this objection. The vice in it, though, is that a later oral or implied contract is itself an agreement. As a US commentator recently observed (Snyder, "The Law of Contract and the Concept of Change: Public and Private Attempts to Regulate Modification, Waiver and Estoppel" (1999) Wis L Rev 607 at 640): "The question for the court is not whether to honour the parties' original agreement, but rather which of their agreements should be effective. To say that contract law should enforce the parties' agreement, therefore, does not resolve the issue. The question is whether to enforce the first agreement or the second. The common-law courts addressing [no oral modification] issues chose the second. This choice makes a fair amount of sense; the later agreement probably reflects what the parties want better than their earlier agreement does." I would add that the opinion expressed in the second quoted paragraph is particularly appropriate to relational contracts which, as in the present instance, may be evolutionary in character. 221 (6) Though lacking legal effect in the face of a subsequent oral or implied agreement, it seems to be accepted that a no oral modification clause can have significant evidentiary effect. As Holmes J commented in Bartlett v Stanchfield, above: "The [clause] is a fact to be taken into account in interpreting the subsequent conduct of the plaintiff and defendant"; see also Principles of European Contract Law, above, Art 2:106. 222 (7) As a practical matter, the lack of legal efficacy of a no oral modification clause may be attributable as much to the law of estoppel as it is to the apparent policy of the law to favour a later agreement over an earlier one: cf Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd, above, 275ff; see also W J Alan & Co Ltd v El Nasr Export and Import Co [1972] 2 QB 189 at 213. As Farnsworth observes: "In most cases [in the US] holding such clauses ineffective … the party that seeks to escape the effect of the no oral modification clause has relied upon the oral modification": Contracts, 450 (3rd ed). 223 I have not here made reference to the various submissions advanced by the parties concerning the legal effect which ought be given cl 45.1 of the Sub-Contract. I mean no disrespect in so doing. While there may be interesting questions yet to be resolved in applying the relevant principles to claims for extra works/variations under building contracts containing writing requirements for such works: see eg the judgment of Mason P in Trimis v Mina, above, at [55]ff; the principles themselves are not, in my view, open to serious question - the more so in a court of first instance: see Liebe v Malloy, above; the Crothall Hospital case, above.
(ii) Formation of a contract of variation 224 By way of prefatory comment I use the term "relational contract" in what follows and in these reasons generally as signifying no more than that it is "a contract that involves not merely an exchange, but also a relationship, between the contracting parties": Eisenberg, "Relational Contracts", in Beatson and Friedman, Good Faith and Fault in Contract Law, 296 (1995). Likewise, I should not be taken as suggesting that special rules apply to such contracts though I will indicate, as is well accepted, that particular rules of contract law have greater or less ease of application in relational contract settings. However, I would suggest that account should be taken of such contracts as we shape and develop contract law: see eg Goldwasser and Ciro, "Standards of Behaviour in Commercial Contracting" (2002) 30 Aust Bus Law Rev 369. 225 There has been a number of recent instances in which courts in this country have given extended attention to the principles governing contract formation: see eg Brambles Holdings Ltd v Bathurst City Council (2001) 53 NSWLR 153; John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd [2002] NSWSC 43. The parties, reasonably, have not suggested that a like exposition is again necessary in this instance. For present purposes I would merely note the following propositions which are relevant to issues raised in this proceeding. 226 (1) Parties to an existing agreement may vary or extinguish some of its terms by a subsequent agreement: Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd, above. In so doing the parties will have made "two contracts": Federal Commissioner of Taxation v Sara Lee Household & Body Care (Australia) Pty Ltd (2000) 172 ALR 346 at 350; with the latter, no less than the former being subject to the ordinary rules governing contract formation: eg BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 286; Tekmat Pty Ltd v Dosto Pty Ltd (1990) 102 FLR 240 at 248. 227 (2) Conduct engaged in for the purposes of ongoing commercial arrangements is not always readily susceptible to the traditional forms of analysis employed by common lawyers for the purposes of determining whether a contract has been formed: Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd (1988) 5 BPR 11,110 at 11,117. This can be particularly the case when dealings are analysed on an offer and acceptance basis. So in Vroon BV v Foster's Brewing Group Ltd [1994] 2 VR 32 at 81, Ormiston J was prepared to accept: "that agreement and thus a contract can be extracted from circumstances where no acceptance of an offer can be established or inferred and where the most that can be said is that a manifestation of mutual assent must be implied from the circumstances." Likewise in Integrated Computer Services Pty Ltd, above, at 11,118 McHugh JA observed that: "in an ongoing relationship, it is not always easy to point to the precise moment when the legal criteria of a contract have been fulfilled. Agreements concerning terms and conditions which might be too uncertain or too illusory to enforce at a particular time in the relationship may by reason of the parties' subsequent conduct become sufficiently specific to give rise to legal rights and duties. In a dynamic commercial relationship new terms will be added or will supersede older terms. It is necessary therefore to look at the whole relationship and not only at what was said and done when the relationship was first formed." 228 (3) "In determining whether the communications between the parties constitute a contract the court is not confined to a consideration of the terms or manner in which the communications were made: they must be interpreted by reference to the subject matter and the surrounding circumstances including, inter alia, the nature of, and the relationship between, the parties, and previous communications between them, as well as to standards of reasonable conduct in the known circumstances": Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd (1979) 1 BPR 9251 at 9255. See also Australian Broadcasting Corporation v XIVth Commonwealth Games Ltd (1988) 18 NSWLR 540 at 550. 229 (4) Post-contractual conduct is admissible on the question whether a contract was formed though it is not admissible on the question of what that contract, if formed, means: Brambles Holdings Ltd v Bathurst City Council, above, at 163-164; Lord Steyn, "The Intractable Problem of The Interpretation of Legal Texts", 9ff, The John Lehane Memorial Lecture (2002). 230 (5) The need frequently arises in relational contracts of significant duration to adjust terms to accommodate changed or unforeseen circumstances. For that reason it is common for such contracts to make express provision for variation. Nonetheless, and notwithstanding their contract, parties in an ongoing business relationship equally commonly "regulate their relationships in accordance with what they consider is fair and reasonable or commercially necessary at particular points in time rather than by reference to a priori rights and duties arising under a contract": Integrated Computer Services Pty Ltd, above, at 11,117. 231 (6) There are two discrete classes of case where, notwithstanding that the agreement of the parties does not finally settle what is intended to be the totality of their anticipated rights and obligations inter se, that agreement nonetheless can constitute a valid, effectual and binding contract. The first class of case, now well accepted: see John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd, above; is where the parties are content to be bound immediately and exclusively by the terms they have so far agreed upon while expecting to negotiate additional terms that will be embodied in a further contract that will be in substitution for the first contract: Sinclair, Scott & Co Ltd v Naughton (1929) 43 CLR 310; Graham Evans Pty Ltd v Stencraft Pty Ltd [1999] FCA 1670, Full Court of the Federal Court of Australia. The second class of case is where, for the purposes of bringing about what is anticipated will or may be their ultimate legal relationship, the parties separately contract for discrete steps or stages leading to that anticipated relationship. Common examples are a process contract followed by a substantive contract: eg Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; or contracts dealing with discrete periods or discrete subject matters of the anticipated relationship: cf South Sydney District Rugby League Football Club Ltd v News Ltd (2000) 177 ALR 611 at 700-701. What differentiates this class of case from that earlier mentioned is that a later contract is not intended to be in substitution for the first contract. Rather it is an additional and different contract. 232 As will be seen, both of the above classes of case are relevant in this matter. 233 I will in my "Findings and Conclusions" refer to one distinct matter of legal principle that has not been the subject of detailed submissions, though it arises out of an assertion made by GEC Marconi. This relates to how inconsistencies between the content of an original agreement and that of a later variation agreement are to be resolved, the inconsistencies being created by the variation agreement. Submissions 234 The following is intended only as a broad outline of the respective conclusions each of the parties invites me to reach as to the existence and scope of the alleged Emulation Variation Agreement. In the following section ("Findings and Conclusion"), I refer to more detailed aspects of the quite voluminous written and oral submissions made by the parties on the Emulation Variation Agreement. 235 The parties' submissions reflect the temporal division (pre- and post- 1 November 1995) made in the factual narrative above. I imply no criticism in saying that while this allows for a more ordered consideration of a volume of material, it somewhat artificially contrives the framework for judging the consequences to be attributed to communications and conduct engaged in by the parties in what was clearly a continually evolving relationship that was confronting changing circumstances for which complex responses were necessary. I will comment further on this matter in my "Findings and Conclusions" which, for the same reasons of convenience, adopts the temporal division in the parties' submissions to which I have referred. 236 BHP-IT's case can be put shortly. In its primary form it is that BHP-IT's acceptance on 1 November of GEC Marconi's offer to undertake CR3049 gave rise to the Emulation Variation Agreement. The scope of that agreement was to be discerned from anterior correspondence (or anterior correspondence and conduct). The agreement removed both BHP-IT's obligation to provide STUBS as CSI and GEC-Marconi's obligation to integrate it with the ADCNET software. It substituted for those obligations an agreement that the Sub-Contract was to be completed using emulation software for acceptance testing. The agreement to emulate necessarily carried with it an agreement to amend all subsidiary documents such as the FRS so as to enable emulation to be used effectively up to and including acceptance testing. Subsequent contract variations such as that flowing from CR3060 evidence the carrying into effect of the Emulation Variation Agreement. 237 BHP-IT contends that, while no formal contract amendment document was executed by the parties, it nonetheless is contained in the correspondence and associated documents that passed between the parties from the 25 July 1995 letter onwards. That documentation was sufficient to satisfy the writing requirement of cl 45.1 of the Sub-Contract. In any event, it is said, cl 45.1 was ineffective to defeat the Emulation Variation Agreement if it did not satisfy cl 45.1 as it was a later valid and binding contract. It was also contended that GEC Marconi waived its right to insist on cl 45.1 (a matter considered under the heading "Waiver" below). 238 The secondary submission advanced by BHP-IT was that the Emulation Variation Agreement (having similar terms to that advanced in the primary submission) was agreed or confirmed in January 1996 as a result of change requests and/or contract amendments made in December 1995 and January 1996 (ie CA30, CR3060 and CR3015 and its associated documentation). 239 Before noting GEC Marconi's response to BHP-IT it is convenient to note as well the Commonwealth's submissions on this matter. The Commonwealth's interest in BHP-IT's defence of the GEC Marconi claim is twofold. First, BHP-IT in its Further Amended Cross-claim against the Commonwealth seeks an indemnity and/or damages in respect of any liability BHP-IT may bear to GEC Marconi. Secondly, given the notices of breach served by BHP-IT on the Commonwealth are substantially identical to those served by GEC Marconi on BHP-IT, to the extent that BHP-IT is able successfully to resist the claims made against it by GEC Marconi for breach of the Sub-Contract, so also should the Commonwealth be able to resist the claims made by BHP-IT under the Head Contract. 240 Because their respective interests in defending the claim by GEC Marconi are common, the Commonwealth has in the main been content to adopt BHP-IT's submissions albeit with some elaboration on occasion. Save for Mr Wishart's letter to Mr Brent of 23 October 1995, all of the relevant documentation relied upon by BHP-IT to establish the variation agreement either originated with, or was passed to, the Commonwealth. 241 There are several additional Commonwealth submissions that require notice. First, it is claimed that under Schedule 6 of the Head Contract and of the Sub-Contract, the CSI (including STUBS) could be changed in the manner envisaged in that Schedule (ie by revising the Preliminary ADD). Such a change was made as a result of CR3060 which removed references in the ADD to STUBS devices etc and replaced these with references to STUBS emulation software. 242 Secondly, the Commonwealth emphasises that the possible need to emulate for acceptance testing had been raised at the very inception of the two contracts. Likewise, the issue of whether STUBS would be available at all was known by BHP-IT and GEC Marconi from at least February 1995. 243 Thirdly, it was contended that the basis upon which the parties contracted in entering into the respective Emulation Variation Agreements was that the Head and Sub-Contracts would be completed using the emulator but that at the same time they would explore the feasibility of a replacement for STUBS. 244 Fourthly, to the extent that it is said by GEC Marconi that it was technically impossible to complete the contract using the emulator (unless the FRS was amended to remove those "testable shalls" that presupposed STUBS had been supplied), neither the Commonwealth nor BHP-IT could insist on requirements that could not be demonstrated using the emulator once they had required the contract to be completed with the emulator. 245 GEC Marconi's response to BHP-IT's defence is two tiered. The first focuses upon the writing formalities and variation procedures ordained by cl 45.1 and cl 11 of the Sub-Contract. The second's concern is with whether there was an Emulation Variation Agreement. 246 As to the ordained contractual formalities, it is contended that (i) the writing requirements of cl 45.1 were mandatory but were not complied with; (ii) before the Sub-Contract could be varied otherwise than in accordance with cl 45.1 that clause itself had to be varied to permit such variation, but such did not occur in the instant case; (iii) even if the writing requirement was not mandatory, the Court, nonetheless, should be slow to infer that the parties intended a contractual amendment in circumstances where the requirements of cl 45 and cl 11 were not adhered to but had previously been adhered to regularly when amendments were intended. 247 As to the alleged Emulation Variation Agreement, GEC Marconi accepts that a contractual relationship was created as a result of BHP-IT's acceptance of GEC Marconi's offer to undertake CR3049 but that the resultant contract was not at all as BHP-IT suggests. It is acknowledged that the terms of that contract were not to be found simply in what was stipulated in the 24 August letter which was annexed to CR3049 as that was varied by conduct (and in particular in correspondence) up to 1 November. But it is contended that what was agreed was neither that emulation was to replace the obligation to supply STUBS so as to allow completion of the Sub-Contract, nor that the emulator was to be used for acceptance testing. The purpose of CR3049 as agreed after it was announced that STUBS was cancelled was to enable the development of the ADCNET software to continue. An emulator was necessary for that purpose as the ADCNET software was designed with an interface to STUBS and it was not then known with what it would eventually interface. From the time of STUBS' cancellation alongside emulation discussions there were discussions for the replacement of STUBS with KIV-7 being contemplated for this purpose. Those discussions made it improbable that the parties had agreed to delete the obligation to provide STUBS and to complete the Sub-Contract using the emulator. It is GEC Marconi's contention that no change to the parties' contractual rights was intended unless and until agreement was reached on a replacement. 248 Distinctly, GEC Marconi submits that the agreement propounded by BHP-IT was so inherently uncertain as to be incomplete and unenforceable. It did not identify what were the consequential changes that needed to be made to the FRS, the ADD and other contract-mandated documentation. Nor did it provide an agreed mechanism for working out those changes. 249 The events which occurred after 1 November, it is said, are of no assistance in the matter either because they are post-contractual and cannot be used to determine what were the terms of the antecedent contract, or because they do not confirm or carry forward contractually the alleged Emulation Variation Agreement.
(d) Findings and Conclusions 250 It is common ground between the parties that a contract was formed on BHP-IT's acceptance of GEC Marconi's offer to undertake CR3049. What is in issue is the content of the contractual commitments then made. To anticipate what follows, my own view is that what was agreed was no less than the Emulation Variation Agreement propounded by BHP-IT. The terms of that contract were not to be found in a simple documentary exchange of an offer and an acceptance. Rather they were to be discerned from communications made and actions taken, leading to BHP-IT's acceptance of the CR3049 offer. I do not consider that, in their setting, those communications and actions admit of any other conclusion than what was agreed was the Emulation Variation Agreement. 251 In reaching my conclusion I have relied little on the evidence of witnesses called (save for Mr Wishart), unless that evidence is supported by contemporaneous documentary evidence. I regard the uncorroborated evidence of Mr Brent and Roger Cooke in particular as being generally unreliable though for different reasons. I have made little reference to it in these reasons. I later indicate my reasons for treating Mr Brent's evidence as I do. Here I would merely note that so imperfect is his recollection and so obvious is his reconstruction that it would be unsafe in most instances to accept his evidence unless supported by contemporary documentation. I do not rely upon Mr Cooke's evidence for a different reason. I am unable to resist the conclusion that, while there was much in the detail of his evidence that was helpful, he was clearly strategically partisan in the evidence he gave. This was most apparent in his embellishment of, or qualification of, contemporary documentation whether composed by himself or others. 252 Before turning to the documentary evidence, it is necessary to reiterate that this is one of those cases in which the ongoing working relationship of the parties is a factor of no little importance for the light it sheds upon the communications made and actions taken in the period of immediate concern: cf Film Bars Pty Ltd v Pacific Film Laboratories Pty Ltd, above, at 9255; Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd, above, at 11,118. That relationship provides the context in which documentary exchanges are to be interpreted. They cannot properly be divorced from it. 253 By way of general background to what, somewhat inaccurately, I will call the "CR3049 contract", I would note three matters. First, not only did the Head Contract and Sub-Contract contemplate the possible need for test harnesses for CSCI and acceptance testing: see eg Schedule 7, WP4500; but also it was actually envisaged from early in the life of the ADCNET contracts that emulation of the STUBS devices could be necessary (inter alia) to minimise the effects of possible delays in the provision of STUBS related items. Secondly, notwithstanding the formal obligation under the contracts to supply STUBS, it was appreciated both by BHP-IT and by GEC Marconi from at least 20 February 1995 that there was some possibility that STUBS might never be available. Thirdly, by the time active consideration was being given to the emulation of STUBS for acceptance testing purposes, the Commonwealth (hence BHP-IT) had twice been in contractual default in relation to the delivery of STUBS items and, in relation to the provision of the STUBS untrusted software, remained in default. 254 The communications between BHP-IT and GEC Marconi that had direct bearing on the content of the CR3049 contract began, for practical purposes with Peter Wishart's response of 3 August to Mr Brent's letter of 20 July 1995, in which he confirmed GEC Marconi's capability to design and develop test harnesses to emulate STUBS. The premise of that communication was - and I so find - that the emulation envisaged was for the purposes of acceptance testing. 255 The Commonwealth's letter of 25 July foreshadowing what later became CR3049 was forwarded by BHP-IT to GEC Marconi on 4 August. It is common ground in this proceeding (a) that the letter contemplated acceptance testing with an emulator, but (b) the formal obligation to provide the STUBS devices remained. As to the latter, DFAT's letter of 10 August that was forwarded to GEC Marconi on 11 August, while reiterating that the emulation proposed would be for acceptance testing, referred directly to circumstances in which GEC Marconi could incur liability under the contractual warranty when "STUBS [was] implemented". 256 Pausing at this point, and disregarding Roger Cooke's evidence to the contrary which I reject, the only reasonable understanding the parties could then have entertained of what was being proposed was that emulation was to be used for acceptance testing under the Head Contract and Sub-Contract, notwithstanding the continuing obligation to provide STUBS. It is in consequence unsurprising that, in the context of the negotiations over contract extensions and delay claims, GEC Marconi incorporated in its own proposals to BHP-IT that it "implement a STUBS harness suitable for development and acceptance of R3". 257 The proper interpretation to be given Les Cook's letter of 24 August (which was incorporated by reference into CR3049) has been a significant issue in this proceeding. The stimulus to this letter is revealed in its heading and opening two sentences. These state: " EFFECTS OF HAVING TO EMULATE STUBS DEVICES There have been suggestions that the need to emulate the STUBS devices will result in significant delays to the development schedule. The Department does not accept that such delays are beyond the control of the PSI." The letter went on to identify what in Mr Cook's view were the software modules the testing of which could have effects on the schedule (ie those modules which interfaced to the STUBS devices or other software which depended on those modules). The letter indicated that integration testing of such software was not scheduled to be performed before STUBS emulation could be made available and that effects on testing at CSC level of such software could be minimised by developing the emulation in two parts (which it then went on to outline). 258 GEC Marconi has submitted that this letter departed from what was envisaged by the 25 July letter in that it only contemplated the use of the emulator for CSU testing, CSC testing and integration testing. In its submissions the Commonwealth quite properly asked rhetorically: "What had changed in the intervening fortnight [from the 10 August letter]?" 259 I cannot accept GEC Marconi's submission. The purpose of the letter was not to canvass directly the emulation to be expected of the emulator as such (though it did contemplate, variously, "full emulation" and "emulation of all functions defined in the STUBS SIS"). Its concerns were with quite particular subject matter. These were (a) with delay to be occasioned by the need to produce the emulator; (b) with identifying where in the testing processes (ie CSC testing etc) actual delays might occur; and (c) with proposing how those delays might be minimised (ie by the two part development). I do not consider that the letter qualified, or could reasonably be taken to have qualified, the previously stated intent of the 25 July letter that the emulator was to be used for acceptance testing. 260 When CR3049 was raised by DFAT on 6 September it described the scope of work (inter alia) as "Develop STUBS emulation software in a way that will minimise the impact on the project schedule (refer to Mr Cook's letter dated 24/8/95)". I would make two comments of this. The first is that, given the explicit concern with minimising delay to the schedule, the reference to Mr Cook's letter is unsurprising. Secondly, the form used for the change request did not itself go on to describe further the purposes to be served by the STUBS emulation software. The only proper inference to draw from CR3049 as raised is that it carried forward the purposes stated in the 25 July and 10 August letters that emulation was to be used for acceptance testing. Mr Wishart's risk analysis report of 8 September 1995 clearly indicated that this was what he understood was being proposed. I would also note in passing that Roger Cooke's "contract negotiations" letter of 11 September to Mr Brent embodied a like proposal. 261 In light of subsequent events, I should indicate what, in my view, was at this time being proposed by the Commonwealth, hence BHP-IT, to GEC Marconi and was well understood by all three parties as being proposed. It was that (i) there be a full surface emulation of the STUBS devices; (ii) emulation be used for acceptance testing; and (iii) formally, the obligation to supply STUBS devices (albeit at a later date) remained. For its part, GEC Marconi was representing to BHP-IT that it had the capacity to design and develop an emulator that could be so used. I would also add that by the end of August, Peter Wishart was of the view that it was most unlikely that STUBS would be available at all. 262 The cancellation of STUBS had a number of effects on what so far had been proposed, the principal of which were encapsulated in Les Cook's 26 September letter. This letter is of some moment in this proceeding. First, it was obvious that with the cancellation there was no further need for a full surface emulation of STUBS. This was made plain by Les Cook at the time and was reiterated as I will note below in the 26 September letter. Secondly, with the demise of STUBS, a new strategy for ensuring boundary security needed to be adopted. Again Les Cook outlined at the cancellation meeting(s) the proposal that KIV -7 be considered for this purpose. 263 An apparent link was made between these two matters in the following part of the 26 September letter: "It is now important that a strategy to replace [the STUBS] devices be agreed by all parties, including the Department's security authorities and DSD. In order to avoid further schedule delays, the Department has agreed that an emulation of the STUBS devices should proceed in the interim to the extent necessary to complete the development and testing of ADCNET software which depends on the functioning of the interfaces to STUBS devices. To the extent practical, this emulation should be reduced from a full emulation of the STUBS interface to the minimum functions which will allow ADCNET software to be tested." I would note in passing that GEC Marconi has submitted that the reference in this passage to "an emulation … [proceeding] in the interim" was no more than a delay avoidance device to permit development to proceed during the period that might be occupied by the parties in their negotiations for a replacement device. It was no longer emulation for acceptance testing. 264 Immediately following the above passage, the 26 September letter continued: "DFAT is awaiting advice from the PSI as to the extent of such an emulation and whether this will be scoped in response to the original change request or whether that CR should be cancelled and replaced with another. The most recent development was that Mr Wishart and Mr Newton will examine the specification and advise. Despite the lack of a formal response to the CR, the Department accepts that continued work on the emulator is a valid delay mitigation strategy." 265 The reference made here to CR3049 (which Mr Wishart was then costing for scoping the work) is of some significance. As I have indicated, CR3049 envisaged both a full surface emulation and the use of emulation for acceptance testing. The letter clearly enough recognised that there was now an asymmetry between the former of these and what was now being proposed (ie a cut-down emulation). This, of itself, would explain why Les Cook would ask whether CR3049 "should be cancelled and replaced with another". The critical question, to which I will return below, is whether the letter purported as well to address and modify the second requirement of CR3049 (ie emulation for acceptance testing). 266 GEC Marconi has submitted that the reference in the quoted paragraph to Mr Newton and Mr Wishart 'examining and advising' left the question of the extent of the emulation to the future and in consequence robbed the letter of contractual significance. I should indicate immediately that I reject this submission. The letter indicated unequivocally the emulation that was proposed and sought. How that was to be achieved and the specifications for it were clearly seen to be matters for further discussion if not agreement. This was understandable given the "to the extent practical judgment" that the letter indicated need to be made. But that of itself would provide no impediment to the parties being able to agree to the proposal for emulation made even if there was the need for further agreement on the means to be employed to that end: cf the discussion of cases of this type in John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd, above, para 217ff. 267 In relation to the cost of work necessary to examine strategies to replace STUBS, DFAT indicated in the letter that this would be covered by one or more change requests. Les Cook in fact raised such a Change Request (CR3052) on the same day. 268 I have referred above to GEC Marconi's submission that the emulation contemplated by the letter was simply an interim measure to avoid delay and to allow development to proceed while replacement negotiations took place. It is further submitted that the references simply to "testing" with the emulator was significant. When coupled with the notions of emulating "in the interim" and of testing the ADCNET software "which depends on the functioning of interfaces to STUBS devices", it is said that there are clear indications that what the letter contemplated was not the use of the emulator for completion of the ADCNET software but merely for completion of those parts of it which interfaced to STUBS. What ultimately seems to have informed these submissions was an appeal to "commercial sense". It was proposed that acceptance testing with a STUBS emulator in anticipation of the eventual arrival of STUBS would make obvious commercial sense. Acceptance testing with a STUBS emulator in anticipation of the eventual arrival of a boundary security device other than STUBS would not make obvious commercial sense. Whether or not there was any commercial sense would depend upon knowing the outcome of negotiations for the agreed strategy to replace STUBS. 269 I am unable to accept these submissions. Despite the assertion to the contrary, they divorce the letter from the context and the relationship in which it was passed. The letter formally addressed what all parties recognised was a new state of affairs. After months of uncertainty as to whether STUBS would be available late or at all, that matter was now clarified. It was not coming. In consequence a new strategy needed to be agreed. The need for such a strategy inhered in the very nature of the ADCNET project itself. Boundary security was an integral element of it. The clear burden of the letter was a request now to move on, to treat STUBS as expunged from the project and the ADCNET contracts, and to agree a strategy for replacement devices. The CR3049 proposal, if accepted, had already envisaged acceptance testing of the ADCNET software without STUBS. That testing should go ahead, albeit with a "cut down" emulator, in order to avoid further schedule delays which would result from waiting until a replacement had been decided. 270 In relation to acceptance testing, the letter changed nothing - and I do not consider that the reference to testing software that interfaced with STUBS imposed a change or limitation on the emulation to be undertaken. That reference was linked to the explanation of the cut-down emulation now being sought. What change the letter did invite the parties (ie BHP-IT and then GEC Marconi) to accept was that (i) STUBS was being removed from the ADCNET project, hence the ADCNET contracts, and a replacement strategy in consequence needed to be agreed; and (ii) a full surface emulation was no longer necessary. It also envisaged further communications concerning the specifications for the emulator (involving Mr Wishart and Mr Newton). That matter is further considered below. 271 GEC Marconi's appeal to "commercial sense" is, in my view, misplaced. A rational commercial entity having regard to its own self-interest could have rejected what was being proposed for the "commercial sense" reasons proposed in GEC Marconi's submissions - though its so doing could well have imperilled the levels of trust and cooperation to be expected in a contractual relationship having the history and characteristics of the ADCNET contracts. I will return to this theme later in these conclusions. What those commercial sense reasons cannot permissibly do is contrive the meaning of the terms of the letter itself. Given the history of the matter, what Les Cook was proposing as the way forward was both reasonable and, I would venture, understood at the time - as witness Peter Wishart's oral evidence on the 23 October letter referred to below. 272 The use of the phrase "in the interim", if understandable, was perhaps unfortunate. What was being proposed could be said to be an interim measure pending a hoped for further agreement for a replacement. But it was nonetheless, a distinct and self-contained contractual arrangement for completing acceptance testing of the ADCNET Release 3 software. What was being proposed, in other words, was what was expected to be the first of successive contracts: cf South Sydney District Rugby League Football Club Ltd v News Ltd, above, at 700-701. And it does seem clear (as witness Les Cook's 12 October letter quoted in the "Additional Factual Material") that, for its part, DFAT did not consider that the ADCNET project could be completed until the second - the "replacement" - contract had been agreed. I would add that the sequential character of what was being proposed provided, perhaps, the basis of Peter Wishart's erroneous belief that the STUBS cut-down emulator agreement was in fact dependent upon reaching agreement on the alternative strategy. 273 GEC Marconi made no direct response to the 26 September letter though it commenced acting in ways consistent with what was proposed. Mr Newton was commissioned to design the cut-down emulator. Mr Harris made the requested comments on CR3052. 274 The next significant sequence of correspondence for present purposes was the 23 and 25 October letters to BHP-IT which accompanied GEC Marconi's quotation for CR3049. Because of their significance it is necessary to again set out their terms although I will not repeat here the evidence earlier narrated that bears on why the second letter was written. 275 The 23 October letter, which was approved in substance by Mr Breden stated: "The price shown for the attached Change Request (CR3049) are to implement the emulator and cover our costs in rescheduling to remove any impact of the late delivery of the STUBS devices (or replacement). The software for CR3049 will not be developed with the process defined in the ADCNET Software Development Plan. It will be developed using rapid prototyping type methods with minimal external reviews, targeted at producing non-production software. The software is only to be used for development, integration and acceptance of the system under the contract. Warranty after acceptance will not apply since the software will not be used after the system has been accepted. In order to avoid an impact on the project of the delay to STUBS we will reschedule the work to put the STUBS related work later in the project. This involves examination of the CSC dependencies and a rescheduling of most of the CSC's. This allows the STUBS work to be done later and still maintain the project schedule. The cost for this work is shown under the Rework of Schedule item. This rescheduling removes the need for a delay claim associated with late delivery of the STUBS devices (or replacement)." The 25 October letter simply stated: "Attached is the cost to complete for CR3049. Please note that the late delivery of STUBS devices (or replacement) may be the subject of delay claims." 276 All three parties have put in extensive written submissions on the significance and interrelationship of these letters. Even though they communicated GEC Marconi's offer to undertake CR3049, I do not consider that they warrant quite the attention they have been given. 277 As to the 23 October letter, neither it nor the attached Change Request actually describe the emulator to be implemented, though the heading to the letter refers to "CR3049 (Cut-down Stubs Emulator)". However, it is clear that what was contemplated by all parties was the emulator proposed, not in the original CR3049, but in the 26 September letter which was now finding reflection in Mr Newton's paper and the API's that had been sent via Mr Brent to Les Cook by 16 October. 278 The second paragraph in its reference to use of the software for "acceptance of the system under the contract", did no more than describe the purpose of the emulator in terms that both BHP-IT and the Commonwealth would reasonably have expected in light of the 26 September letter and its predecessors back to the letter of 25 July. As I have indicated, the policy of using the emulator for acceptance testing had remained unchanged from 25 July (though the need for it had changed with the cancellation of STUBS) and CR3049 was the vehicle that was to give effect to that policy. Mr Wishart in oral evidence accepted that he thought his understanding at the time was that the emulator would be used for acceptance testing. And such clearly were the contemporary understandings of the Commonwealth and BHP-IT. 279 Even if this letter did not contain this description of the purpose of the emulator, that statement of purpose would necessarily still be taken to have been part of the CR3049 offer in any event. It was, and was known to be, what was expected of the emulator since July 1995. 280 The evidence on the relationship of the two letters is unsatisfactory. I am satisfied that Mr Brent, Roger Cooke and Mr Wishart were, or became, concerned about the observation in the third paragraph of the 23 October letter that what was there being proposed removed "the need for a delay claim associated with the late delivery of the STUBS devices (or replacement)". Mr Brent clearly raised the matter with Mr Wishart on 24 October, and the matter clearly was discussed by Roger Cooke and Peter Wishart. I am equally satisfied, despite Roger Cooke's evidence to the contrary, that this reference to delay claims alone was all that was of concern in the letter to either Roger Cooke or Mr Wishart. 281 It is unnecessary to express any concluded view on whether a copy of the 23 October letter was retrieved by Mr Wishart from Mr Brent. The evidence on this matter is unsatisfactory. I am satisfied, though, that Mr Wishart met with Mr Brent and discussed the 23 October letter. I am also satisfied on the balance of probabilities that they did not wish this letter to be operative between the two companies because of what was contained in the offending third paragraph concerning the absence of any need for a delay claim and that that provided the explanation for the sending of the 25 October letter (which expressly flagged a possible delay claim). I accept that Mr Wishart may well have intended to replace the 23 October letter with that of 25 October, even if such may not physically have occurred. But I do not accept that he intended to resile from, or to bring home to Mr Brent that he had resiled from, what was conveyed in the second paragraph concerning acceptance testing. Given the prior communications back to 25 July about the purpose of the emulation it would have required a very clear statement indeed on Mr Wishart's and GEC Marconi's part that the emulator was not to be used for acceptance testing if this was what was intended to be conveyed to BHP-IT by the 25 October letter. 282 The 25 October letter and the attached CR3049 did not describe at all either the emulator to be implemented (ie cut down or otherwise) or the purpose of the emulator. In consequence, as BHP-IT rightly submits, the CR3049 offer that was being made necessarily had to be understood in the light of the previous communications. Again, as BHP-IT submits, those communications going back to July 1995 proceeded on the basis that the emulator would allow acceptance testing. That never changed. And it was on this basis that the CR3049 offer was made. Equally, in light of the 26 September letter and its reflection in the Newton paper and APIs sent to Mr Brent prior to 25 October, the emulation that was being offered BHP-IT was a cut-down one. GEC Marconi has made particular submissions on which of Mr Newton's papers it says have possible contractual significance. I deal with those submissions below in the context of communications between Les Cook and Mr Wishart on 13 and 22 November. I merely note here that I have not accepted those submissions. 283 Finally, and I will return to this below, it ought be inferred that at or around the time of making the 25 October offer GEC Marconi was offering, and would properly and reasonably be taken as offering, to proceed on the basis proposed in the 26 September letter as to the way forward - there would no longer be an obligation to provide STUBS and the parties would seek to agree to a strategy to replace STUBS through Change Requests (one of which had already been raised by the Commonwealth and commented upon by GEC Marconi). CR3049 as now amended was an integral part of what had been proposed. If it was to be divorced from those proposals, GEC Marconi had to bring that home clearly to BHP-IT. It did not. 284 BHP-IT communicated its acceptance of the CR3049 offer to GEC Marconi on 1 November 1995. Unlike in the Head Contract, no consequential formal Contract Amendment was executed for the Sub-Contract. I do not consider this to be of any particular moment. The Contract Amendment (CA23) for the Head Contract in any event merely described the amendment as "Development of STUBS emulation software for the Department of Foreign Affairs". As a statement of the burden of the Emulation Variation Agreement and of its significance for the then terms of the Head Contract, that description was utterly uninformative. I likewise do not consider that the internal contradictions on the face of the Head Contract's CA23 illuminated in any way, or otherwise had bearing upon, the nature and terms of such contract as was entered into by BHP-IT and GEC Marconi at this time. 285 I am satisfied that the Emulation Variation Agreement was formed at least by 1 November. I will explain below the reasons for the uncertainty as to when all parts of that agreement were settled. 286 If I am incorrect in concluding that GEC Marconi's offer on 25 October encompassed, or could reasonably be interpreted as encompassing, eliminating the obligation to supply STUBS, I remain satisfied that its CR3049 offer was to develop STUBS emulation software to enable the ADCNET Release 3 software to be acceptance tested using emulation and that that offer was accepted. I will refer to this as the "emulation agreement". If that agreement alone was all that was entered into on 1 November 1995, it would nonetheless have considerable significance in this proceeding, particularly in relation to the defences of affirmation and estoppel raised by BHP-IT. I will refer to those defences later in these reasons. 287 It is necessary to indicate what I consider to be the terms of the Emulation Variation Agreement and whether or not these are capable in the circumstances of giving rise to an effective and enforceable contract. As I have already indicated, GEC Marconi's principal submission has been that the parties never intended to enter into such an agreement. I have rejected that submission. GEC Marconi's further submissions are that if there was such a purported agreement (a) it was ineffective because of the writing requirement of cl 45.1 of the Sub-Contract; (b) it contained inconsistent provisions concerning the obligation to provide STUBS; (c) it was inherently uncertain and unenforceable because no amendments had been made to a range of contract-mandated documents and particularly the FRS; and (d) any agreement that STUBS no longer had to be supplied by BHP-IT was conditional on the parties subsequently agreeing a replacement. 288 These submissions provide a convenient vehicle to deal with some number of the issues concerning the terms and the effectiveness of the Emulation Variation Agreement. Before turning to them it is appropriate that I indicate without further elaboration what I find to be the terms of the agreement. These are that: (i) GEC Marconi would develop STUBS emulation software: (CR3049); (ii) that software should emulate the STUBS devices to the extent necessary to complete the development and testing of ADCNET software that depended on the functioning of the interfaces to STUBS devices: (the 26 September letter - the cut-down emulation); (iii) the emulator would be used in acceptance testing of the ADCNET Release 3 software: (the common understanding of the intended purpose of the emulation since 25 July 1995); (iv) BHP-IT was no longer contractually obliged to provide STUBS devices under the Sub-Contract as CSI: (the 26 September letter proposal); and (v) the parties would amend all subsidiary contractual documentation (including the FRS) so as to enable emulation to be used for acceptance testing: (an implied term). I would add that this agreement was made in a setting in which the parties had available to them the machinery of the Sub-Contract for amending the terms of the contract and the contractual documentation so as to give formal expression and/or effect to what they had agreed.
(i) Non-compliance with the cl 45.1 writing requirement 289 I have already indicated that such a provision in a written contract does not preclude parties from later entering into even an oral contract to vary that written contract. It is the case, though, that no single document exists that was signed by the parties which embodied all that, objectively, was agreed by them. Given the view I take of the ineffectiveness of cl 45.1, it is unnecessary to decide whether, having regard to the totality of the written communications between them, all of the terms actually agreed were agreed in writing signed by the parties. My own view is that such, probably, was not the case and that it is necessary to resort as well to what was manifest in conduct to ascertain the terms of the contract. I would, for example, note that for reasons given below it may well be said that GEC Marconi's agreement to the deletion of the obligation to provide STUBS was manifest initially in conduct. 290 I should also indicate that I accept that (a) the existence of cl 45.1 and the related procedural cl 11 in the Sub-Contract, and (b) the pattern of their prior use, are facts to be taken into account in determining whether the subsequent conduct of the parties was intended to be contractual in nature though not conforming to those clauses or to that prior usage: Bartlett v Stanchfield, above, at 395. Nonetheless I am satisfied that the course of communication and conduct in this instance was intended to, and did, have a contractual outcome in the agreement I have found. 291 There is one additional matter to which I need refer though I will not enlarge upon it. It proceeds on the assumption that I am incorrect in the view I take as to the legal effect of a provision such as cl 45. If cl 45 was binding and not complied with, I would nonetheless find that GEC Marconi was in the circumstances estopped from setting up the lack of writing to defeat the Emulation Variation Agreement: cf Principles of International Commercial Contracts, Art 2.18. That estoppel, I am satisfied, has been sufficiently pleaded and in issue to allow this matter to be raised. I refer to it briefly below in "Estoppel".
(iii) The contract was inherently uncertain 292 These two matters can be dealt with together. As I understand them, GEC Marconi's submissions are premised on my having found an agreement both to emulation for acceptance testing and to remove the obligation to provide STUBS. It is contended that by agreeing this much without also agreeing to make corresponding amendments to requirements in those subsidiary contractual documents (the FRS, the ADD, etc) that are premised upon STUBS being available for acceptance testing and which would preclude the use of the emulator for that purpose, the parties have created a state of affairs in which the Emulation Variation Agreement and the Sub-Contract contain inconsistent provisions. 293 Alternatively, it is said, even if a consequence of the Emulation Variation Agreement was that the subsidiary contractual documents were to be amended, there was no agreed mechanism for identifying the provisions that required change or for determining what were the changes that were needed. In consequence the contract was inherently uncertain and unenforceable. 294 These submissions, in substance, challenge the implied term I have said was part of the Emulation Variation Agreement. Before discussing that term - which I consider to be a complete answer to GEC Marconi's submissions - I should comment first on the general issue raised by GEC Marconi and on the responses made to it by BHP-IT and the Commonwealth. 295 I have already indicated that GEC Marconi concedes that the STUBS emulator was capable of being used for acceptance testing but that the impediments to its being so used were provisions in the subsidiary contractual documentation and in particular the FRS which contained "testable shalls" which could not be demonstrated using the emulator. As BHP-IT indicated in its written submissions, the experts called - Dr Lewis and Professor Offen - both expressed like views to the above concession. Later in these reasons I will refer to events in 1996 where it is claimed the Commonwealth and BHP-IT offered to waive those FRS and other requirements that stood in the way of completing acceptance testing using the emulator. My concern here, in contrast, is with whether the emulation variation contract itself actually eliminated the alleged impediments to completing acceptance testing on which GEC Marconi has focussed. 296 BHP-IT's response on this matter seems to be twofold. First, it contends that the parties' agreement to remove the obligation to provide STUBS and to use emulation for acceptance testing, constituted agreed variations to the Sub-Contract. As such these variations attracted the operation of cl 11.2 of the Sub-Contract. It provided that where one party proposes contract variations to the other in writing, then - "If the receiving Party accepts the variations, the Contract Specifications shall be deemed to incorporate the accepted variations from the date upon which the receiving Party notifies the proposing Party in writing that it accepts the variations." The "Contract Specifications" referred to were defined in the Sub-Contract to include (inter alia) the FRS and the ADD. Accordingly, by force of this provision the subsidiary contractual documentation was deemed varied so as to permit the use of the emulator for acceptance testing. The actual documentation itself would later need amendment to accord with this new state of affairs. It was GEC Marconi's obligation under the contract to update the subsidiary documentation to incorporate approved contract amendments: Schedule 7, cl 2.2, WP 2100. 297 Distinctly, BHP-IT submitted that the agreement that STUBS was no longer CSI and that emulation would be used for acceptance testing carried with it necessarily an agreement to amend all subsidiary documents (including the FRS) so as to enable emulation to be effectively used for development, integration and acceptance testing. This, it is claimed, was part of the agreed scope of the variation agreement. 298 The Commonwealth, while adopting BHP-IT's submissions, added a further variant based on irrevocable waiver which led to the result that BHP-IT was precluded from taking advantage of GEC Marconi's inability to complete acceptance testing with the emulator to the extent that it could not demonstrate requirements that were premised on the provision of STUBS. This waiver involved a true abandonment of rights and was irrevocable in consequence of GEC Marconi's proceeding to build the emulator. 299 For its part GEC Marconi has submitted that cl 11.2 of the Sub-Contract only applied to variations that were sufficiently precise to admit of incorporation; it did not apply to consequential variations occasioned by an agreed variation; and the acceptance of the variation had to be in writing. These requirements were not satisfied in this instance. 300 Alternatively, it was contended that, given the actual inconsistency between the Emulation Variation Agreement and the subsidiary documentation, no term could be implied into the agreement obliging the parties to act jointly so as to remove any inconsistency. The reason for this was that the contract as it stood provided for inconsistent benefits and it was impossible for the parties to cooperate to give effect to those inconsistent provisions: cf Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104. 301 Before turning to my own conclusion on this matter, there are some evidentiary considerations to which I should refer. First it is not open to doubt that, with appropriate changes to the Sub-Contractual documentation, the emulator could be used for acceptance testing. The experts stated as much. GEC Marconi's contract negotiation proposal for emulation presupposed as much. Secondly, the identification of the needed changes was a technical matter on which opinions might differ. But there is no reason to believe that, if agreement as to the necessary changes was required for acceptance testing to be completed, that could not have been achieved. Thirdly, as Mr Varatharajan accepted in oral evidence, the requirements that prevented completion with the emulator would have become apparent in any event at the time of system integration. 302 In my view, it simply confronts common sense to suggest that, having agreed to use an emulator for acceptance testing, the parties would nonetheless have continued to agree that BHP-IT would remain able to insist upon provisions in subsidiary documents that would have the effect of preventing that testing being completed. It is for this reason both that BHP-IT and the Commonwealth had striven to find justifications for the contrary result, and that GEC Marconi's submissions in opposition are quite so unappetising. 303 For my own part I do not consider that the BHP-IT submission based on cl 11.2 of the Sub-Contract is available to it. The effect that sub-clause procures is, I consider, properly to be considered as dependent upon the parties following the procedure mandated by cl 11. That procedure required direct specification of proposed variations to the Sub-Contract and explicit agreement in writing by the other party to those proposed variations. Where agreement was procured in this formal way, it is understandable that the parties would agree in consequence to a provision such as cl 11.2 notwithstanding that later formal changes to the Contract Specifications were required to be made - the more so given that GEC Marconi was contractually obliged to update those Specifications to accord with agreed contract amendments. There is a document to which the parties could later turn that described what actually was proposed and for which agreement was given. However, where the parties' agreement is to be divined, as here, from a course of communications and of conduct, it seems to me that neither the letter nor the spirit of cl 11 applies to such an agreement. BHP-IT did not explicitly submit a copy of its proposed contract variations to GEC Marconi. It did not receive GEC Marconi's acceptance in writing of those variations. I have found that the parties did agree to contractual variation but this they did in what I consider to be an informal contract part of which, it is reasonably arguable, was to be inferred from GEC Marconi's agreement to undertake CR3049. 304 Rejecting the cl 11.2 submission is not the end of the matter. I, nonetheless, consider that there was an implied term of the Emulation Variation Agreement that related to the consequential amendment of the subsidiary contractual documentation. Before turning to that implied term, it is appropriate to question the very premise of GEC Marconi's submission that the inconsistencies between the Emulation Variation Agreement and the Sub-Contract's documentation render the emulation agreement ineffective. Accepting that there are such inconsistencies, two consequential questions need to be answered. The first relates to the legal effect of the Emulation Variation Agreement on the Sub-Contract. The second relates to how the Sub-Contract is to be interpreted (if it still remains on foot) after it has been varied. 305 As to the first of these questions, it is clear that when the parties contracted in the Emulation Variation Agreement to vary the Sub-Contract they did not intend to end the Sub-Contract and replace it with that variation agreement. Rather their intent was to leave the Sub-Contract on foot subject to the alteration: cf Federal Commissioner of Taxation v Sara Lee Household and Body Care (Australia) Pty Ltd, above, at 350-351; Tallerman and Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd, above, at 144. In consequence it was the Sub-Contract as altered that the parties were required to perform. But that contract now contained inconsistent provisions relating in particular to acceptance testing. And the resolution of that inconsistency? 306 There is a large body of case law dealing with how a contract should be construed when it contains inconsistent provisions, having regard to the nature and cause of the inconsistency: see generally Cheshire and Fifoot, Law of Contract, 213 (8th Aust ed); Chitty on Contracts, vol 1, para 12-076 (28th ed); Lewison, The Interpretation of Contracts, para 8 - 08ff (2nd ed); Farnsworth, Contracts, s7.11 (3rd ed). It is unnecessary here to outline in detail the various "rules" of construction that have evolved to resolve inconsistencies. These rules reflect the types and causes of inconsistencies: if specially tailored terms contradict standard terms, the specially tailored terms will prevail over the standard terms: cf Re Theodorou [1993] 1 Qd R 588; "[i]f a later clause cannot be reconciled with an earlier one creating an obligation, then if it altogether destroys the obligation it must be treated as void": Australian Guarantee Corporation Ltd v Balding (1930) 43 CLR 140 at 151; if the terms of a document incorporated into an agreement conflict with expressly agreed terms in that agreement, the expressly agreed terms prevail: Modern Building Wales Ltd v Lemmer and Trinidad Co Ltd [1975] 1 WLR 1281 at 1289; etc. The common thread in the cases is that effect is given to that part of an agreement "which is calculated to carry into effect the real intention of the parties as gathered from the instrument as a whole, and that part which would defeat it must be rejected": Chitty on Contracts, para 12-076. 307 In the present case the real intention of the parties in relation to acceptance testing must be regarded as having been reformed by the Emulation Variation Agreement. Accordingly, the agreement to complete using emulation must prevail over those provisions in the subsidiary documentation that would prevent this outcome occurring. The alleged inconsistency in other words would be resolved as a matter of construction though, it might be said, a hiatus in the subsidiary documentation necessary for acceptance testing would ensue. 308 It is unnecessary to consider whether the obligations imposed by the Sub-Contract would themselves require the parties to amend the subsidiary documentation to permit acceptance testing with the emulator. No submissions have been made either on this point or, for that matter, on how the rules of construction to which I have referred provide an answer to GEC Marconi's submission. 309 BHP-IT, quite properly, was content to deal with resolution of the alleged inconsistencies by resort to the terms of the Emulation Variation Agreement itself. It was an implied term of that agreement that, having agreed emulation would be used for acceptance testing, the parties would amend all subsidiary documentation (including the FRS) to permit this to occur. 310 For my own part, necessary corollaries of BHP-IT and GEC Marconi agreeing that BHP-IT was no longer obliged to provide STUBS and that the STUBS emulator would be used for acceptance testing were that: (1) BHP-IT could no longer insist upon, and GEC Marconi could no longer be required to demonstrate, those requirements of the subsidiary documentation that would defeat the very thing agreed - ie acceptance testing using the emulator; and (2) given the known contractual role of the FRS and other subsidiary documentation in acceptance testing, that documentation would be amended to permit acceptance testing using the emulator. It may well be that these corollaries were so much part and parcel of what actually was agreed by the parties as to be able properly to be treated as representing their inferred intent. However, I consider that it is both open and sufficient to imply a term ad hoc to the same effect. 311 The present case is clearly one in which "the parties themselves did not reduce their agreement to a complete written form … [they] have left some [of the terms] … to be inferred or implied": Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 442. In determining what, if any, terms should be implied in such circumstances, it is now well accepted that caution is required against a rigid or automatic application of the criteria specified in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283, which govern the implication of terms into formal written contracts: see the discussion in Yau's Entertainment Pty Ltd v Asia Television Ltd [2002] FCA 338 (Full Court) at [27]ff. 312 For present purposes, and in light of Yau's case, it is sufficient to say that a term based on the parties' imputed intention should be implied into the Emulation Variation Agreement if, but only if, it can be seen that the implication of the particular term is necessary for the reasonable or effective operation of the contract in the circumstances of the case, and that that term so would have been accepted by the parties as a matter so obvious that it would go without saying: see Yau's case at [33]-[36]. 313 The term that I have indicated should be implied satisfies the Yau requirements. It is, indeed, integral to what actually was agreed. While it may be said that it would be sufficient simply to imply a term precluding BHP-IT from relying on those provisions that would prevent the emulation being used to complete acceptance testing, the role the Sub-Contract contemplates for the subsidiary documentation in acceptance testing makes necessary the implication that the parties will amend that documentation to permit acceptance testing with the emulator. 314 There are two additional comments I would make for the sake of completeness. The first is that it remained open to the parties to later reach a different agreement both about emulation and about documentary changes. And such might, though need not necessarily, have happened if a replacement for STUBS was earlier agreed and was available. Secondly, the implied term I have found does require further matters later to be agreed by the parties, albeit to achieve a known end. The Emulation Variation Agreement was, nonetheless, a complete contract. What was left over were "matters of detail" which it was open to the parties to leave "for future decision" and inclusion in the formal contractual documentation: Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601 at 619; and see Graham Evans Pty Ltd v Stencraft Pty Ltd [1999] FCA 1670; John R Keith Pty Ltd v Multiplex Constructions (NSW) Pty Ltd, above. 315 One matter I have not considered in dealing with GEC Marconi's submissions is whether the inconsistency issue raised may be able to be resolved by resort to the order of precedence of documents prescribed by cl 2.1 of the Sub-Contract. I express no view on that matter.
(iv) A contingent agreement 316 The submission made here by GEC Marconi is that, if there was an agreement that BHP-IT was no longer obliged to provide STUBS, that agreement was contingent upon a replacement for STUBS being agreed. 317 There is no doubt that from the time of the 26 September letter, the parties became engaged in the processes that it was hoped would lead to the agreement of a replacement strategy for STUBS. CA3052 was raised on the very day of the letter. Nonetheless, as I indicated when considering that letter, what was proposed were two discrete activities each of which, if agreed to, would give rise to separate contracts. The first was to remove STUBS from the ADCNET contracts and to proceed to acceptance testing with an emulator. The second was to use change requests to examine replacement strategies. 318 It was, perhaps, the expectation of all parties at the time that a replacement would be agreed - this was Les Cook's preferred outcome. Yet there was nothing in the 26 September letter or in any subsequent correspondence before 1 November to justify the conclusion that the Commonwealth, hence BHP-IT, was making the deletion of STUBS contingent upon such later agreement. On the contrary. The Commonwealth was concerned to complete the ADCNET project and agreement on a replacement strategy was essential to that. The Commonwealth indicated in its 12 October letter, for example, that it wished to tie agreement on that strategy to the ongoing contract negotiations for extension to the contract schedule and that it trusted that work on CR3052 would be completed quickly "so that the overall negotiation on contract variations to allow the project to move to completion may be concluded": emphasis added. 319 What the Commonwealth did not do as well was to tie the deletion of the STUBS obligation to the contract extension negotiations or to the agreement on a replacement strategy. It is unsurprising it did not. STUBS no longer had any place in the ADCNET project. This was irrespective of whether the parties were later able to agree a replacement strategy. The 26 September letter was proposing a moving on from the old STUBS status quo. 320 I am unable to agree that the emulation agreement was contingent in the manner suggested by GEC Marconi. 321 The additional comment that should be made on the agreement to delete the STUBS obligation is that, while it was not assented to in express terms, that assent can properly be inferred from GEC Marconi's binding itself to undertake CR3049, if not from actions taken some time before then. Objectively considered, its assumption of that task in the context both of what was proposed in the 26 September letter and of the steps already taken by way of participation in what was proposed (ie the comment on CR3052 and the exchanges over the Newton paper), manifested to BHP-IT not merely an assent to develop the cut-down STUBS emulator for acceptance testing, but also agreement as to how to proceed for the future - there would be no STUBS and no obligation to provide it and resort would be had to the change request procedure to explore replacement strategies. 322 It is unnecessary for me to express a concluded view on whether GEC Marconi so conducted itself prior to 1 November as to be taken as having earlier bound itself to at least the abandonment of STUBS. It had prior to that date begun to act in ways consistent with what was proposed on 26 September. Given the view I have taken of the 1 November contract, I need not determine whether, there had already been a sufficient "manifestation of mutual assent" to delete the STUBS obligation and to seek to agree a new strategy through Change Requests: Vroon BV v Foster's Brewing Group Ltd, above, at 81; see also Integrated Computer Services Pty Ltd, above, at 11,118. 323 In the end, I am satisfied that by 1 November 1995 the parties entered into the Emulation Variation Agreement. That agreement provided a complete defence to the claim brought by GEC Marconi insofar as it is founded on a continuing failure to supply STUBS. 324 I will comment below more generally on my conclusion that the parties entered into this agreement, but before so doing I should refer (more briefly) to the post-1 November matters on which BHP-IT relies in confirmation, or in furtherance of, that agreement. The evidence here is, in a sense, multi-dimensional in its significance in that it is of relevance, variously, to BHP-IT's defences of election to affirm, estoppel and contractual variation.
(i) The November correspondence concerning the emulator 325 The evidence dealing with this matter has been outlined above in "Additional Factual Material". It will not be repeated here. GEC Marconi has submitted that this correspondence concerning the emulator, being post-contractual, cannot be relied upon to demonstrate the terms of the 1 November contract. In any event, it is said that correspondence merely confirms that CR3049 related only to development testing of the ADCNET software and not to acceptance testing of the ADCNET system. 326 As to the latter point I am satisfied that, objectively considered, Mr Wishart's 22 November response to Les Cook's comments in his 13 November letter, conveyed in clear terms that CR3049 would be adequate for its agreed purpose and that, as I have indicated, was to enable the parties to complete acceptance testing of the ADCNET software without STUBS devices. Unsurprisingly, Mr Wishart in oral evidence indicated that he understood Les Cook's letter as being premised on that purpose and that his own technical description in his 22 November response of what the "cutdown STUBS emulator was intended to provide" conveyed that the emulator was to allow the ADCNET Release 3 software to be acceptance tested. 327 I do not accept, though, that these communications are inadmissible on the basis of the principle that "post-contractual conduct is not admissible on the question of what a contract means": Brambles Holdings Ltd v Bathurst City Council, above, at 164. The purpose of the emulator was agreed on 1 November 1995 at the time CR3049 was agreed. Agreement on that purpose did not, in my view, carry with it the consequence that further comment on, and revision (if necessary) of, the specifications for the emulator were foreclosed as from that date. Given that the function to be performed by the emulator was specified by the ultimate Customer, the Commonwealth, its continuing comments on the sufficiency of the specifications for their purpose was properly to be expected. 328 What is to be inferred, then, from this exchange of correspondence is that it confirmed for the time being that the specifications proposed were sufficient to effectuate the agreed purpose of the emulator. It constituted, in other words, a review of the sufficiency of the documentation supporting CR3049. As such I regard it as part of the matrix of facts of later actions of the parties which were, or were intended to be, contractual in character and which in differing ways gave, or were intended to give, effect to the Emulation Variation Agreement as I have described it.
(ii) Sub-Contract Amendment 30 329 This Contract Amendment incorporated changes to Schedule 8 of the Sub-Contract to reflect an extension of time to complete the work approved in twenty-eight change requests one of which was CR3049. I do not regard CA30 as illuminating in any relevant way the Emulation Variation Agreement. For present purposes, it merely acknowledges the fact of CR3049, but not its burden.
(iii) GEC Marconi's 14 December risk report 330 Item 13 of this risk report stated that "STUBS devices is (sic) not being used on ADCNET". It regarded the risk associated with STUBS availability as "Closed". This report was sent to Mr Brent on the same day, Mr Wishart indicating in the accompanying letter that he would like the report used "as the basis of the project risk management meeting with BHP and DFAT". 331 While assisting in establishing the common understanding of the parties at the time as to the status of STUBS in the ADCNET project, this evidence probably is not admissible to prove either the earlier 1 November Emulation Variation Agreement: cf Brambles Holdings Ltd v Bathurst City Council, above; or the terms of the later Contract Amendment (CA31), there being no relevant ambiguity etc that, as objective background circumstances, this evidence could assist in resolving: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 348ff.
(iv) Change Request 3060/Contract Amendment 31 332 The evidence relating to this Change Request and Contract Amendment (signed by Mr Brent and Mr Wishart on 18 and 19 December) has been narrated above. Briefly described, on 1 November 1995 Mr Harris of GEC Marconi made a number of updating amendments to the ADD, removing references to STUBS devices etc (though not all such references) and replacing these with references to STUBS emulation. These amendments to the ADD were part of the subject matter of CR3060. The letter sending CR3060 to Mr Brent on 28 November 1995 described the updating as removing or replacing references to STUBS. The changes made were approved by the Commonwealth and BHP-IT. The resultant Contract Amendment authorised the replacement of the pages of the ADD on which amendments had been made. Further it required that the "Contract should be amended to refer to the Architecture Design Document as Version 2.1. (Schedule 1 in the Contract)". 333 The Commonwealth and BHP-IT have attributed large significance to this Contract Amendment. The ADD for the time being was one of the two documents that constituted the Customer's Functional Specifications under Schedule 1 of the Sub-Contract. Their submission is that the Sub-Contract, Schedule 6 paras 1.2, 1.3 and 1.4 envisaged that CSI equipment and Non-Developed Software could be subject to change as a result of revising the Preliminary ADD for the purpose of preparing the Final ADD. This change to the specified CSI by the Customer's substitution of a different item of CSI for the originally specified CSI as part of the System requiring integration with the Developed Software, need not have been a breach of the Customer's obligations under the Contract, nor even a variation of its terms. Instead it was a variation of the content of existing obligations under the Contract taking effect no later than upon the agreement to, and the making by the Contractor of, appropriate changes to the Final ADD. 334 To understand this submission it is necessary to set out at some length provisions of the Sub-Contract and of its Schedules. The CSI to be supplied by GEC Marconi pursuant to cl 7 of the Sub-Contract was that specified in Schedule 6. Paragraph 1.2 of that Schedule stated: "CSI shall include the equipment and non-Developed Software as defined in subclause 1.4 below. While such equipment and non-Developed Software may be subject to change as a result of revising the Preliminary Architecture Design Document for the purposes of preparing the Final Architecture Design Document, any increase …": emphasis added. Paragraph 1.3 provided, insofar as presently relevant: "The following principles will apply to the evolution of the equipment configuration required for the development, integration, testing and commissioning of the Canberra and post and regional office systems: … (ii) the configuration defined under Item 1.4(b) shall be known as the Test and Integration/Acceptance Test System; … The Software Development System and the Test and Acceptance System shall be defined in the Software Development System Design Document and the Test and Acceptance System Design Document respectively." Paragraph 1.4(b) provided in part: "Test and Integration/Acceptance Test System The physical configurations for the following systems shall be described in the Final Architecture Design Document. The Test and Integration/Acceptance Test System shall consist of the following systems: Secret Canberra System: … (xi) STUBS devices and related equipment and software." 335 Finally, cl 9 of the Sub-Contract required GEC Marconi to prepare the Final ADD, and to submit it for review and subsequent acceptance in accordance with the Implementation Plan. That plan indicated that review of the Final ADD was to occur at Milestone 2000. By cl 9.6 the Final ADD was one of the documents in accordance with which GEC Marconi was to "integrate the System". 336 Put shortly the submission is that, by replacing STUBS with STUBS emulation in the ADD, the contracted for CSI was changed. That some STUBS references in fact remained was to be explained as oversight, no one intending by their continuing presence in the ADD that STUBS was ever going to be used in ADCNET. 337 For its part GEC Marconi has submitted that the actual updating of the ADD engaged in by GEC Marconi suggested no more than that, as a transitional matter, the system would include STUBS emulation but that it did not vary in any way GEC Marconi's contractual obligation in relation to testing. Importantly no changes were made to the "testable shalls" in the FRS. 338 Additionally it was submitted that the ADD which was amended was not the Final ADD envisaged by the Sub-Contract. The ADD would only become the Final ADD when it was accepted at Milestone 5000. It would be that document which would depict at the end of the process what the actual architecture of the system was. 339 I should indicate immediately that I do not accept this last submission. The document reviewed at Milestone 2000, which was an earlier version of the ADD amended by CA31, was itself described in the Schedule 8 "Implementation Plan" as the "Final Architecture Design Document". When para 1.2 of Schedule 6 referred to changes to CSI "as a result of revising the Preliminary [ADD] for the purposes of preparing the Final [ADD]", I consider that the obvious contemplation of the provision in the setting of a contract that envisaged change, was that agreed changes to the ADD reviewed at Milestone 2000 were "changes for the purposes of preparing" the Final ADD and that they had contractual effect once so agreed unless and until they were later changed by a further amendment to the ADD. In this sense the Final ADD could be said to be and remain an evolving document until it had served all of its purposes and was contractually spent. But throughout that process it was at all times the Final ADD. 340 Of GEC Marconi's general submission that CA31 was transitional, unrelated to testing, and inconsistent with the FRS, I again cannot agree. The actual terms are not, in my view, uncertain or ambiguous such as would permit resort to the factual matrix of this contract to assist in their interpretation: cf Codelfa Construction Pty Ltd v State Rail Authority of NSW, above, at 348ff. What is important, for present purposes, is to ascertain the purpose and legal effect of the Contract Amendment. To discover these does, in the end, require resort to the Sub-Contract as altered by the Emulation Variation Agreement, given the relationship of CA31 to the Sub-Contract it amended. The ADD identified the hardware and software components of the system to be delivered. Under the Sub-Contract (Schedule 7, cl 2.2, WP2100) GEC Marconi was required to update the ADD to incorporate approved Contract Amendments. As Mr Harris said in evidence, it was important that the ADD reflected the architecture of the hardware that would be part of the final delivered system. That system was required by cl 9 of the Sub-Contract to be integrated in accordance with (inter alia) the ADD. 341 Considered in this setting, there is nothing in my view in the terms of the amendments (so far as they went) or in the background matters to which I have adverted, to suggest that the amendments were, and were intended to be, transitional. Those amendments, having been accepted by the parties, had contractual significance. By virtue of the terms of the Sub-Contract, their premise was that performance of the Sub-Contract involved integrating the software with the components of the System described in the ADD including the emulation and that acceptance testing would be of the Developed Software so integrated. The purpose of CA31, as far as it went, was to give effect to that premise. 342 The alleged inconsistency with the FRS - a document of coordinate precedence in the matrix of contractual documents - was of itself, in my view, of no significance at the time; irrespective of the matter of construction of inconsistent provisions to which I earlier referred. The agreement to acceptance test using STUBS emulation required significant updating of contractual documentation if that testing was to be conducted in accordance with the documentation and not by resort to so-called waivers and ad hoc variations. The parties having agreed to this updating in the Emulation Variation Agreement, it clearly was open to them to update that documentation piecemeal, and to the extent that the updating was inconsistent with as yet unvaried documentation, the former not the latter gave effect to the real intention of the parties as now expressed in the Emulation Variation Agreement. 343 There is one additional matter to which I should refer in relation to CR3060/CA31. Mr Harris gave evidence of what at the time was his understanding about the emulator and its use for acceptance testing. That evidence has no relevance to any contractual issue with which I am concerned. If it had, I would have rejected it. It is, moreover, inconsistent in significant respects with contemporary documentation.
(v) Change Request 3015: Acceptance Test Plan 344 Schedule 9 of the Sub-Contract prescribed the criteria to be used to develop the ATP. The ATP was to be used to show that the Developed Software complied with the "testable shalls" of the FRS. Again, it was Mr Harris who was responsible for the ATP. 345 In the "Additional Factual Material" above I have referred to the raising of CR3015 to amend the ATP in consequence of the cancellation of STUBS, to the amendments proposed by GEC Marconi, to their acceptance by the Commonwealth and BHP-IT and, importantly, to GEC Marconi's subsequent refusal ultimately to sign CR3015 in March of 1996. By that time, GEC Marconi had indicated its view that the non-provision of STUBS might constitute a default by BHP-IT. 346 Though the significance of CR3015 has been the subject of lengthy submissions by all three parties, I do not consider it necessary to rehearse their various contentions in any detail. GEC Marconi's submissions, in addition to claiming that CR3015 had in the end no contractual consequence, simply reiterate by now familiar objections: the amendments were intended to be transitional; and the contractual obligation of GEC Marconi remained that of demonstrating the "testable shalls" of the FRS. 347 In these circumstances I will state my own conclusions shortly. The Change Request originally signed by Mr Harris stated its "Issue/Concern" to be: "Changes to ATP to show agree HW config[uration], software and External Devices required for FQT [ie acceptance testing]". The relevant amendments proposed in the ATP sent to Mr Brent on 7 February 1996 by Mr Goldsmith (now GEC Marconi's project manager) were described as: "Removed STUBS Sealers, Stubs Devices, KDC workstations, STUBS Audit workstations and STUBS conversion. STUBS Gateway workstations remain. STUBS conversion software changed to STUBS emulation software." The STUBS workstations referred to are of no significance for present purposes. Illustrative of the changes made are those to para 3.3.2.3.1 which were as follows: "3.3.2.3.1 Stubs {DELETE Devices DELETE} Emulation 3.3.2.3.1.1 {DELETE The availability of Stub devices during the Acceptance testing is likely to be limited and will not be sufficient to support the Acceptance Tests. The use of simulators and/or interface stubs and any test waivers related to the Stub device will be resolved by agreement between the Customer and the Contractor.DELETE} Stubs Sealer and Stubs Gateway emulation software shall be used for FQT testing." At the time GEC Marconi received CR3015 and the related proposed CA39 on 8 March from BHP-IT for signing, it was aware that the Commonwealth had approved the Change Request (subject to presently inconsequential amendments). I equally infer that at that time GEC Marconi was aware that BHP-IT likewise approved of the amendments. It is the case, though, that no contract amendment actually was signed by GEC Marconi. I will comment later on the wellsprings of GEC Marconi's decision to so act. 348 In the circumstances I am unable to find that the ATP amendments (a) had contractual effect and (b) were another piecemeal step in giving effect to the Emulation Variation Agreement (which provided the rationale for the proposed ATP amendments). At best the events leading up to GEC Marconi's refusal to sign evidence the clear common understanding of the parties that the Emulation Variation Agreement both had been entered into and was being put into effect. It do not consider that the proposed amendments were intended to be other than operative when agreed. The only sense in which they may have been transitional was if, before completion of acceptance testing, a later contract was entered into for a STUBS replacement which was required to be integrated with the ADCNET software. I equally consider that the failure to propose parallel amendments to the FRS at the same time would not have robbed the ATP amendments of any efficacy, if agreed in a Contract Amendment. I have indicated sufficiently earlier in these reasons why I object to this "inconsistency" submission. 349 The events relating to CR3015 cannot, in the end, be relied upon make out, or to establish a contractual confirmation of, an Emulation Variation Agreement. This said, the significance of those events to BHP-IT's alternative claims based on affirmation by election and on estoppel is self-evident. 350 The final observation I would make on the pre- and post- 1 November communications and conduct of the parties is that, objectively considered, they clearly demonstrate that the parties agreed to the composite of proposals making up the Emulation Variation Agreement and that they then proceeded to put into effect what had been agreed. If there is any element of doubt in this at all, it relates to the precise identification of the point or points in time at which each of the component parts of those proposals were agreed. I have found, in any event, that this was no later than 1 November.
(g) Additional Observations 351 Having found that BHP-IT and GEC Marconi entered into an Emulation Variation Agreement, I should make the following comment about that finding. While I am satisfied as to the making of that agreement and, for that matter, that its making reflected the level of cooperation and fair dealing that the parties exhibited at that time, the agreement itself was an evolutionary one. There is no little artificiality, in my view, in having to subject the communications and conduct of the parties over time to a traditional offer and acceptance analysis. Equally, in my view, the dynamic character of the parties' relationship rather suggests that the temporal differentiation between when an agreement was reached and when it was being performed for the purpose of determining the terms of the contract can be likewise artificial. As the law now stands, I am not permitted to use post-contractual conduct for the purposes of determining the scope of the contract: cf Brambles Holdings Ltd v Bathurst City Council. In relational contract settings at least, I would suggest there is much to be said for the view that such conduct (insofar as it reflects the parties' common interpretation of their contract: cf Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 309ff) should be admissible in the interpretation of their agreement: cf Restatement of Contracts, Second, s202(4); see also Lord Steyn, "The Intractable Problem of Interpretation of Legal Texts", 10. In saying this I acknowledge that "[i]t is not easy to explain why subsequent conduct should be relevant to what the parties intended when the contract was made": Farnsworth, Contracts, 490 (3rd ed).
AFFIRMATION BY ELECTION 352 A distinct defence of BHP-IT is that, if it was in breach of the Sub-Contract by its failure to supply STUBS and if that breach entitled GEC Marconi to terminate the contract either under cl 40 of the Sub-Contract or at common law, GEC Marconi clearly and unequivocally elected to affirm the contract and in consequence lost its right to terminate. 353 This defence, I should note, would come into play if my conclusion as to the entry into the Emulation Variation Agreement was incorrect and if, in the circumstances, a right to terminate existed either under cl 40 of the Sub-Contract or at common law.
(a) Additional Factual Material 354 I have outlined already much of the dealings between the parties covering the period from the cancellation of STUBS in mid-September 1995 until the service of the first Notice of Breach on 3 April 1996. When later in these reasons I deal with the alleged breach arising from the non-payment of Milestone 4000 I will refer to the evidence relating to the Test Readiness Review ("the TRR") which is relevant to the question of affirmation notwithstanding the non-provision of STUBS. There is nothing additional that needs be narrated here.
(b) Relevant Sub-Contract Provisions 355 Though I will defer consideration of the proper construction of cl 40 of the Sub-Contract until later in these reasons, it is necessary because of GEC Marconi's election submissions to refer to the provisions of cl 40.8 and cl 40.9. These provide: "40.8 Where the Customer is in breach of an obligation under this Contract so that there is a failure by the Customer to perform this Contract, the Contractor may, by notice in writing to the Customer, specify that breach and where that breach is capable of being remedied require the Customer within 32 days of receiving such notice to remedy that breach or commence appropriate action to remedy that breach. 40.9 Where the Customer has not: (a) remedied the breach referred to in subclause 40.8 within 32 days of receiving a notice (including because the breach was incapable of being remedied); or (b) commenced appropriate action to remedy that breach within 32 days of receiving a notice and remedied the breach within a reasonable time after that period has elapsed; the Contractor may, by notice in writing to the Customer, terminate this Contract without prejudice to any right of action or remedy which has accrued or which may accrue in favour of either Party."
(c) Applicable Principles 356 (1) A right of election arises when a state of affairs comes into existence which enables a person to exercise alternative and inconsistent rights against another, for example, the right to terminate a contract for breach or repudiation and the right to insist on performance of the contract: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 655. When "confronted" with such a choice that person is required to elect which of the mutually exclusive courses of action he or she wishes to take: Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 at 41; Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyds L Rep 391 at 398. 357 (2) Before a person can be said to be confronted with such a choice, that person must at least be aware of the circumstances giving rise to the choice: Sargent's case, at 656-658; Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 at 635. While there is still some degree of controversy as to whether that person must as well have knowledge of his or her rights in cases involving common law rights: see Carter and Harland, Contract Law in Australia, [1971] (4th ed): cf Chitty on Contracts, vol 1, para 25-002 (28th ed); no issue has been taken in this proceeding as to GEC Marconi's relevant state of knowledge. 358 (3) An election is not required to be made as soon as the choice arises. "[The elector] is entitled to a reasonable time to consider his position and the merits of each course": Champtaloup v Thomas [1976] 2 NSWLR 264 at 273; Majik Markets Pty Ltd v S & M Motor Repairs Pty Ltd (No 1) (1987) 10 NSWLR 49 at 54. As Mason J indicated in Sargent's case, at 656: "He may keep the question open, so long as he does not affirm the contract … and so long as delay does not cause prejudice to the other side". I would note in passing that there is considerable United States authority in favour of the view that a right to terminate "must be exercised with reasonable promptness after discovery of the breach": Cities Service Helix Inc v The United States 543 F 2d 1306 at 1315; and see Farnsworth, Changing Your Mind, 184. I will refer below to the significance of delay and prejudice in this matter. 359 (4) Whether an election has been made is to be judged, not by the subjective intention of the person having the choice, but by that person's words or conduct: Tropical Traders Ltd v Goonan (1964) 111 CLR 41 at 55. What is required is an "unequivocal act": United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30; an election taking place "when the conduct of the party is such that it would be justifiable only if an election had been made one way or the other": Sargent's case, at 656; that is, "it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other": ibid, at 646. Additionally, as the party making an election is "communicating his choice whether or not to exercise a right": Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India, at 399; that choice will, as a rule: cf Halsbury's Laws of Australia, vol 6 "Contract", 110-9465; be required to be communicated to the party affected by the choice: Sargent's case, at 655-656. 360 (5) While subsequent conduct in exercise of a right under the contract will ordinarily manifest an election to affirm - unless the right exercised is one which allows the making of a choice to be deferred eg as in invoking an arbitration clause: Larratt v Bankers and Traders' Insurance Co Ltd (1941) 41 SR(NSW) 215 at 229 - words or conduct that merely recognise the contract may not amount to an election to affirm. As Glass JA commented in Champtaloup's case, at 269: "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, ie 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." So, for example, conduct subsequent to a breach may result in the right to terminate being made conditional on a further breach, as for example in a case where, time being of the essence, an extension of time is given consequent on a failure to complete on time: Tropical Traders Ltd v Goonan, above. Distinctly, the parties' entry into negotiations after a breach or repudiation might, depending on the context and the subject matter of the negotiations, "warrant the inference that there had been … an election", or, in contrast, that the parties were negotiating on the assumption that the innocent party was no longer bound by the contract: Petrie v Dwyer (1954) 91 CLR 99 at 105. 361 (6) There is a considerable body of authority for the proposition that a party cannot avoid the legal consequences of conduct amounting to an election by stating that it is acting "without prejudice": see eg Davenport v R (1877) 3 App Cas 115 at 132; Haynes v Hirst (1927) 27 SR(NSW) 480; Central Estates (Belgravia) Ltd v Woolgar (No 2) [1972] 1 WLR 1048 at 1054. Nonetheless where the conduct said to give rise to an election is "consistent with the reservation of a right to terminate": cf Immer (No 145) Pty Ltd, above, at 30; an election may not be found notwithstanding that acts may have been done that are consistent with the continuance of the contract. Equally, consideration of whether a decision to affirm has been made must take account of "any reservations which have … been communicated": Champtaloup's case, at 269. I would note in passing that in the US the Uniform Commercial Code s1-207 takes a more generous view of the effectiveness of an explicit reservation of rights. 362 (7) The effect of an election to affirm is that, once communicated to the other party, the choice made becomes irrevocable and the right to terminate is lost in respect of the breaches of contract or repudiation that required the election to be made: Sargent's case, at 656; Tropical Traders Ltd v Goonan, above, at 55; and see generally Cheshire and Fifoot, Law of Contract, para 21.31 (8th Aust ed); Chitty on Contracts, vol 1, para 25-003 (28th ed); Farnsworth, Changing Your Mind, 183. The irrevocability of the choice made does not depend on proof of reliance by, or of detriment to, the party in breach. "An election, unlike estoppel, is concerned with what a party does and not what he causes the other party to do": Khoury v Government Insurance Office (NSW), above, at 633. 363 (8) An election to affirm in respect of a breach of contract or of a repudiation does not prevent the elector from relying upon an available later breach: cf Foran v Wight (1989) 168 CLR 385 at 441-442; or repudiation: Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 at 458-459; Carr v J A Berriman Pty Ltd (1953) 89 CLR 327; to terminate the contract provided that there is a later breach or repudiation that is distinguishable from the earlier breach: cf Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221, at 236ff on the distinction between a "once and for all" and "continuing" breach. 364 (9) Distinct rationales have been advanced to support various of the principles that make up the law of election. Because of their relevance to the present matter, I would note the following two matters. First, the requirements that the election be made within a reasonable time (or, in the US, promptly), and that it be irreversible have been said to prevent the elector speculating on the future progress of the contract at the other party's risk: see Farnsworth, Changing Your Mind, at 184ff; that other party, having no control over the choice finally made, being vulnerable necessarily to the party having the power of election: ibid 182. In consequence, these requirements have been seen as having the capacity to help keep together ongoing transactions, for example, construction contracts, in which a breach has occurred sufficient to give rise to the right to terminate: Farnsworth, Contracts, s8.19 (3rd ed). Secondly, and correspondingly, the requirement that the election be communicated to the party affected by the choice made has been said to have no doubt been adopted: "in the interests of certainty and because it has been thought to be fair as between the parties that the person affected is entitled to know where he stands and that the person electing should not have the opportunity of changing his election and subjecting his adversary to different obligations": Sargent's case, at 656.
(d) Submissions and Conclusions 365 BHP-IT has contended that GEC Marconi's election to affirm is clearly evidenced in its continuing to perform the Sub-Contract on the basis that it would be completed without STUBS using emulation software; by GEC Marconi's participation in the various change requests and contract amendments between mid-September 1995 and 3 April 1996; by undertaking the review work for the Test Readiness Review and then issuing an invoice to BHP-IT for Milestone 4000 on 12 March 1996; and by not notifying BHP-IT at any relevant time that it would or might rely on the non-provision of STUBS to trigger cl 40 of the Sub-Contract. 366 Though contesting the construction BHP-IT sought to place on some of the correspondence passing between it and BHP-IT, the Commonwealth substantially supported BHP-IT's submissions and contended, further, that GEC Marconi's election to affirm the Sub-Contract was mirrored in BHP-IT's like election to affirm the Head Contract. 367 For its part, GEC Marconi denies it elected to affirm the Sub-Contract. It contends, first, that cl 40 of the Sub-Contract did not, on the cancellation of STUBS, give rise to an inconsistent right. Rather it clearly contemplated the continued performance of the Sub-Contract, the giving of Notices and of termination thereafter. By continuing to perform - and it was bound to do so pending the issue of Notices - GEC Marconi could not be said to have elected to waive its right to terminate. Secondly, the various contract amendments and change requests are said by GEC Marconi not to evidence an election. In particular, CR3049 was a separate contract and the pending of CR3057 made GEC Marconi's conduct equivocal. Thirdly, it is said that BHP-IT's refusal to supply STUBS was repudiatory and continuing. Even if there was an earlier election this did not preclude a later termination. Fourthly, if the failure to supply STUBS was a "once and for all" breach, GEC Marconi did not elect to affirm and for this it relies upon (a) its inability to complete the ADCNET contract without STUBS in the absence of an agreed variation to the contractual documentation; and (b) its entitlement to await the outcome of negotiations for a variation before it needed to elect whether to affirm or to terminate. 368 My own conclusion is that, despite GEC Marconi's ingenious argument as to the operation of cl 40 of the Sub-Contract, this is a clear case of affirmation and that GEC Marconi's purported termination was an attempt, opportunistically and too late, to avoid a "regretted decision" it had long since made. The non-provision of STUBS was not a "sleeper" that GEC Marconi could awaken for its own advantage five months after the cancellation of STUBS was announced: cf Cities Service Helix Inc v The United States, above, at 1315. Given the nature of the contractual relationship and what transpired in the intervening five months, GEC Marconi had lost its right to resort to cl 40 of the Sub-Contract to precipitate a termination. 369 I should deal first with GEC Marconi's submission that, in the case of a breach that could attract cl 40 of the Sub-Contract, that clause did not occasion the need to make a choice between inconsistent rights as it clearly contemplated a continued performance of the Sub-Contract pending non-compliance with the Notice of Default and the consequent decision to terminate. 370 For my own part I do not consider that the effect of cl 40 can be dispensed with so easily. Assuming the cancellation of STUBS was a failure to perform the Sub-Contract such as to attract the provisions of cl 40, GEC Marconi was then confronted with a clear and obvious choice. It could then and there affirm the contract and claim damages (if it was so minded) flowing from the non-provision of STUBS, but by so doing it could no longer seek to terminate the contract because of that failure to perform. Alternatively it could invoke cl 40 thereby creating the conditions that would permit it to terminate the contract. Such a state of affairs clearly required a choice to be made. It is not sufficient to say that both affirmation and invoking cl 40 required GEC Marconi to continue to act in performance of the contract. That action in performance would be to quite different ends in each case: in one, it was premised upon the contract being kept on foot shorn of the right to terminate; in the other, it was for the purpose of creating the conditions for its demise. 371 GEC Marconi's submission in effect invites me to conclude that, having cl 40 available to it, GEC Marconi could keep BHP-IT at its mercy indefinitely, BHP-IT never knowing whether the continuing performance of the Sub-Contract resulted from GEC Marconi's affirmation or from its intent to keep open the possibility of activating cl 40. This, clearly enough, offends the policies informing the law of election to which I have referred as well as "simple considerations of common sense and equity": Johnson v Agnew [1980] AC 367 at 398. More importantly though, it highlights why a state of affairs existed in which GEC Marconi was able to exercise alternative and inconsistent rights against BHP-IT and why, being confronted with such a choice, it had to elect either to affirm the contract or to activate cl 40. 372 I do not consider that the facts (i) that cl 40 required the giving of a notice to remedy before termination could be effected; and (ii) that termination under cl 40 was not automatic but gave a discretion to the contractor, affected the conclusion at which I have arrived. These provisions provided a graduated procedure involving in the first instance the taking of "a less drastic course of action": cf Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India, above, at 398; before termination could be effected. Affirmation and cl 40 gave rise to two quite different and inconsistent regimes of contractual rights and obligations. GEC Marconi was obliged within a reasonable time to elect of which of the two it wished to avail. 373 I should add the following for the sake of completeness. First, I do not consider that cl 40 was intended to be a provision that would enable deferral for an indefinite period of a decision to terminate. It simply allowed for a period of grace before such a decision could be taken. Secondly, GEC Marconi has submitted that the cl 40 procedure is additional to the common law rights to terminate. If such was the case, and I express no view on the matter, it would be anomalous if the common law right was able to be lost by affirmation while that self-same affirmation did not as well preclude resort to cl 40. Finally, though it does not bear on the question of characterisation of cl 40.8 and cl 40.9, it went without saying when GEC Marconi served the first notice, that it was beyond BHP-IT's power to remedy the breach or to commence appropriate action to remedy it (as envisaged by cl 40.9(a) or (b)). These were matters within the control of the Commonwealth. 374 To the extent that GEC Marconi relies upon the fact of negotiations for a possible replacement to STUBS as relieving it of the need to make an election until the outcome of CR3057 was known, I simply reiterate what I earlier stated (see "Applicable Principles"): negotiations after breach, depending on their context and subject matter, may warrant or preclude the inference that the contract has been affirmed. The fact of CR3052 and CR3057 and the associated dealings between the parties are simply part of the material to be considered in determining whether a choice was made. Even if, contrary to my view, it was the case that GEC Marconi could have delayed making its choice until the outcome of CR3057 was known, it did not do so as I will indicate below. 375 Distinctly, GEC Marconi contends that the refusal to provide STUBS was a repudiatory and continuing breach such that the issue of affirmation did not arise as the repudiation continued to operate until it had been either withdrawn or remedied by performance. Thus, an election to affirm did not preclude a subsequent termination. 376 This, in my view, mischaracterizes the cancellation of STUBS in the setting in which it occurred. It is the case that (i) the loss by affirmation of the right to terminate for breach will not preclude termination for a later repudiation of the contract: Ogle v Comboyuro Investments Pty Ltd, above, at 458-459; (ii) the loss by affirmation of the right to terminate for repudiation will not preclude termination for a subsequent breach of contract that gives rise to the right to terminate: cf Foran v Wight,above at 441-442; and (iii) the loss by affirmation of the right to terminate for breach will not prevent termination for a further breach that gives rise to the right to terminate: Larking v Great Western (Nepean) Gravel Ltd, above, at 236. 377 The present matter, though, does not fall within any of the above three classes of case. I will indicate later in these reasons (the "Construction of Clause 40") that I do not consider that the non-provision of STUBS was, for the purposes of cl 40.8, a "failure … to perform [the] Contract". Accepting for present purposes that it was, it amounted to no more than a failure to perform by reason of a breach of a "once and for all" provision of the Sub-Contract. The obligation to provide STUBS was an obligation to do a definite act and not to create and maintain a state of affairs: cf Larking v Great Western (Nepean) Gravel Ltd. BHP-IT, in fact, persisted in failing to provide STUBS, though there is nothing in the evidence to suggest that that failure during the period relevant for present purposes was other than expected and acquiesced in by the parties. From mid-September 1995 until the first intimations in late February 1996 that GEC Marconi might treat the non-provision of STUBS as a default, the parties were directing themselves, not to the future provision of STUBS, but to agreeing a replacement strategy, with KIV-7 being the initial subject of examination. 378 In the same way that BHP-IT's continuing failure to provide STUBS did not constitute any further breach of contract but was merely a failure to remedy a past breach, the "failure to perform" for cl 40.8 purposes was of a like character. BHP-IT's conduct was not repudiatory in the sense of amounting additionally to a refusal to be bound by the Sub-Contract: cf Carr v J A Berriman Pty Ltd, above at 349. Its failure amounted to "the breach of a specific provision", not "the renunciation of the contract as a whole": cf Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 at 227. I would merely add that, considered in its factual setting, it is far from the reality of the matter to suggest other than that the Commonwealth (hence BHP-IT) were committed to the completion of the ADCNET project so that, once STUBS was cancelled, ways forward were being proposed. 379 I do not consider that BHP-IT was guilty of a further breach of contract or of a subsequent repudiation beyond its breach of contract (and for cl 40 purposes, its "failure to perform") because of the continuing non-provision of STUBS. Likewise I do not consider either (i) that that breach was other than a once and for all breach, or (ii) that the parties at the time considered the breach in any different light. 380 I do not intend again to analyse either the communications and agreements reached or negotiated (if not reached: eg CR3015) between the cancellation of STUBS announcement on 13 or 14 September and the serving of the first Notice in April 1996, or the known conduct of the parties in that period. I would simply make the following observations about it. 381 First, those communications, etc manifested in a variety of ways that GEC Marconi was electing to affirm the contract. The change request and contract amendment mechanisms were used on a number of occasions during that period. That usage was consistent only with a choice on GEC Marconi's part to keep the contract on foot despite the breach. Contrary to GEC Marconi's submission, it is not to the point that some of those requests and amendments involved separate contractual agreements (as for example CR3049). Those agreements were predicated upon, and had no justification without, the continuation of the Sub-Contract. 382 Secondly, the emulation agreement resulting from CR3049, represents the clearest early act of affirmation. Its later culmination in the building of the emulator, its demonstration, and the receipt of payment for it, merely confirmed what had previously been affirmed. 383 Thirdly, GEC Marconi not only did acts which recognised the Sub-Contract, it proceeded to perform its own obligations, not merely in the continued development of the ADCNET software, but also in relation to the TRR contractual Milestone. In relation to the latter it went so far as to call on BHP-IT to perform its Milestone 4000 obligation and to pay GEC Marconi. What makes this latter action the more significant is that it occurred after GEC Marconi had raised the prospect of the non-provision of STUBS being a default under the Sub-Contract. The claim to be paid for Milestone 4000, made over four months after the notice of STUBS cancellation, presupposed that GEC Marconi was relying on the continued operation of the Sub-Contract to make good that claim and that it was insisting upon BHP-IT's continuing performance of its obligations. 384 BHP-IT has not relied upon the passage of time as such to preclude GEC Marconi from asserting its right to terminate, because of prejudice to BHP-IT. Rather it properly points to the communications made and conduct engaged in during that period as confirmatory of the inference that the choice to affirm was made. It likewise points to the absence of any communicated reservation of rights across the period until the default issue was raised in late February 1996. Given both the way forward proposals put by Les Cook in the 26 September letter and the immediate moves made then to investigate a replacement for STUBS, if there was to be any prospect of the inference of affirmation not being drawn from what transpired from and after the CR3049 agreement an explicit reservation of rights needed to be made within a reasonable time and to be communicated to BHP-IT clearly and unmistakably. 385 This was a relational contract and the second in a sequence that dated back to 1990. The parties' actions necessarily need to be considered in the context of a long standing business relationship - a relationship, moreover, through which GEC Marconi sought to derive other advantages from its association with BHP-IT beyond the completion of the ADCNET contract. I merely note in passing that on 6 February 1995 GEC Marconi entered into a standing offer agreement with BHP-IT in the expectation of being asked to provide IT systems integration services to BHP-IT which would in turn be supplied to the Department of Defence: see below "BHP-IT's Termination of the Standing Offer Agreement". 386 The evidence suggests that, notwithstanding uncertainty about the availability of STUBS (in time or at all), from at least July 1995 (if not considerably earlier) the parties were prepared to consider cooperating and to propose compromises (often admittedly self-interested) to have the ADCNET contracts completed. So, for example, GEC Marconi had itself proposed in the context of schedule renegotiation prior to the cancellation of STUBS, that emulation be used to conduct acceptance testing. I consider that through 1995 the parties, though not acting disinterestedly, were regulating their relationship more by reference both to what was fair and reasonable having regard to the objectives of the ADCNET project and to what could be mutually accommodated in changing circumstances, "than by reference to a priori rights and duties arising under [the] contract": cf Integrated Computer Services Pty Ltd v Digital Equipment Corp (Aust) Pty Ltd, above, at 11, 117. 387 That GEC Marconi might activate cl 40 of the Sub-Contract to terminate the contract within a reasonable time after the formal 26 September notice that STUBS would not be provided, was not an expectation that any of the parties including GEC Marconi would reasonably have entertained at that time. Not surprisingly, from 26 September until at least the first default Notice, GEC Marconi continued to perform and to participate in the exercise of rights under the Sub-Contract - as did BHP-IT. In relation to the Head Contract, BHP-IT and the Commonwealth acted similarly. The prospect of termination for breach was simply not on the horizon and the parties acted accordingly. Their negotiations for a replacement strategy were not to be conducted under the shadow of a retained right to terminate. On the contrary. 388 So it was that Mr Sharp could not disagree with the proposition put to him in cross-examination that all of the communications that he had been making with BHP-IT until 19 February 1996 had been aimed at reassuring BHP-IT that GEC Marconi intended to continue with the fixed price contract and that it intended to cooperate with changes to the contractual arrangements that might be necessary to enable that to occur. 389 Mr Sharp went on to admit that he had read the Sub-Contract carefully and that in or shortly prior to March 1996 he had fastened upon the failure to provide STUBS as an opportunity for GEC Marconi to escape from its obligations under the contract. 390 As Mr Hilton SC happily put the matter, GEC Marconi was "content to proceed [with the contract notwithstanding the non-provision of STUBS]. Mr Wishart gave evidence to that effect. That's what the documents say. It's only when the businessmen took over the management of the contract that a commercial decision was made to escape from the obligations … [B]y then it is just too late".
ESTOPPEL 391 There are two quite distinct defences founded on estoppel. The first is premised upon the Emulation Variation Agreement having been entered into but being ineffective to vary the Sub-Contract (contrary to my conclusion) because it failed to satisfy the requirements of cl 45.1 of the Sub-Contract. The defence raised is that the circumstances both leading up to, and consequent upon, the entry into that agreement on 1 November were such as to estop GEC Marconi from later insisting upon the cl 45 writing requirement. 392 The second estoppel defence related to the non-provision of STUBS. Put shortly and somewhat inaccurately, it is that in consequence of BHP-IT's detrimental reliance both on representations by GEC Marconi and on the common understanding of the parties that BHP-IT was no longer required to provide STUBS and that GEC Marconi would no longer assert any right to require it, GEC Marconi was estopped from departing from the position so represented and so conventionally understood.
(1) Estoppel and Clause 45 393 I have already found that the Emulation Variation Agreement was entered into on 1 November 1995 and that the parties proceeded to carry it into effect. Emblematic of the latter were (i) the producing of the specifications for the emulator and the communications between all three parties concerning them; (ii) GEC Marconi's building and demonstration of the emulator; and (iii) GEC Marconi's invoicing BHP-IT and BHP-IT's payment for the performance of CR3049. 394 I likewise have indicated that I consider that it was open to BHP-IT to raise this defence. There was no express pleading of estoppel directed at cl 45.1 as such, but there was such a pleading directed at the obligation to provide STUBS. In the circumstances of this trail and of the issues raised in it, I am satisfied that it was open to BHP-IT to raise the cl 45 estoppel notwithstanding GEC Marconi's protests to the contrary. It arises so directly out of the matters that have been in contention in both the Emulation Variation Agreement and the second estoppel defences that I am unable to accept that it cannot now be relied upon or that GEC Marconi would be prejudiced in any way by BHP-IT so doing. 395 As to the estoppel itself, I consider it unnecessary either to reiterate here the evidence I have already analysed when considering the Emulation Variation Agreement or to anticipate the additional matters to which I will refer when dealing with the second estoppel claim. Having found that the parties entered into the Emulation Variation Agreement, that evidence clearly demonstrates the reliance of both parties on their common understanding that there was such an agreement and that it would be, and then was being, carried into effect. I have illustrated this above. Such reliance in the circumstances makes it unjust to allow GEC Marconi to raise the cl 45 writing requirement and to depart from the understanding it both shared with, and reinforced in, BHP-IT: Thompson v Palmer (1933) 49 CLR 507 at 547; Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251 at 276-277; see also Unidroit, Principles of International Commercial Contracts, Art 2.18.
(2) Estoppel and the Obligation to Provide STUBS 396 The two species of estoppel pleaded are estoppel by representation and estoppel by convention. The former is advanced in both its common law and equitable guises. The evidence relied upon to make out both the representation alleged and the conventional understanding of the parties, is essentially the same as is the subject matter of the representation and understanding respectively. 397 Insofar as presently relevant, the representation and understanding as pleaded were said to be: "(b) the Sub-Contract Variation Agreement had been entered; or (c) the Respondent was no longer obliged to deliver STUBS equipment or associated software to the Applicant; or (d) the Applicant would no longer assert or rely upon any right to require delivery of STUBS equipment or associated software under the Sub-Contract." The "Sub-Contract Variation Agreement", as pleaded, made up only part of the Emulation Variation Agreement I have found. It removed BHP-IT's obligation to provide STUBS and GEC's obligations in respect of STUBS, and it varied the Sub-Contract's contract specifications to that effect. A separate CR3049 STUBS Emulation Agreement has, though, been pleaded. For practical purposes, that Agreement replicated the first three clauses (relating to emulation) of the Emulation Variation Agreement I have found. The Emulation Agreement, I would add, is one of the evidentiary matters relied upon in making out the estoppel advanced. 398 The detriment that has been pleaded as having resulted from BHP-IT's reliance upon the representation or conventional understanding is also common to both claims. It is said to be: "(a) The Respondent did not require the Commonwealth to provide the STUBS hardware and software as CSI under the Head Contract. (b) The Respondent did not serve notices of breach on the Commonwealth under the Head Contract until 11 April 1996 … and did not negotiate a full time and materials variation to the Head Contract." 399 As was perfectly plain from the evidence of a hearing that occupied over seventy days, if the representation and understanding were made or entertained as alleged and were relied upon by BHP-IT, the above two specified matters of detriment (both in the nature of omissions to act) would clearly not exhaust the matters to which BHP-IT might be able to point as possibly constituting detriment if GEC Marconi were to be permitted to depart from what was represented or commonly understood. I will later refer in particular to evidence given by Mr Brent on this. 400 Predictably, BHP-IT in submissions has sought to cast its net more widely than those two specified matters. This, also predictably, has generated a pleading dispute, GEC Marconi alleging it would be prejudiced if this was to be allowed. The prejudice apprehended is the possible effect of not knowing at the time various BHP-IT witnesses were cross-examined of what is now sought to be relied upon. For reasons I enlarge upon in "Findings and Conclusions", I have allowed BHP-IT to raise these "new" instances of detriment. I would have to say that I regard the objection in any event as being more technical than substantial in the circumstances. Given the nature of the representation and understanding pleaded, and the character and extent of the conduct engaged in by the parties subsequent to the alleged representation and understanding, I consider that the apprehended prejudice can in the circumstances be safeguarded against in the findings I am prepared to make. I would note that GEC Marconi has experienced no apparent difficulty in making lengthy submissions on the newly relied upon matters.
(a) Additional Factual Material 401 All of the material referred to earlier in relation to the Emulation Variation Agreement has been recycled for this defence. There are several additional pieces of evidence to which I should refer. It is also necessary to refer in a little detail to Mr Brent's evidence of his state of mind and reasons for action in late 1995 and early 1996. 402 (i) After being appointed General Manager of GEC Marconi, Mr Sharp met with Mr Brent on 27 November 1995. On 5 December Mr Brent wrote a letter to Mr Sharp which contained a resumé of the matters discussed. It included the following: ". EASAMS schedule - you indicated that EASAMS was moving it's ADCNET project control mechanisms to a more rigorous project control regime. We agreed that EASAMS will provide a month-end schedule of the ADCNET project each month to BHP IT beginning with the month of November, 1995; . EASAMS estimate to complete - you indicated that EASAMS propose to have an independent estimator conduct a full re-estimate of the work remaining. These estimates will be calibrated against work completed to determine the accuracy of the estimate; … . STUBS - you indicated that EASAMS would produce a formal priced proposal for the replacement of STUBS by 22 January, 1996. In this context we discussed options for ensuring smooth passage to the proposal." 403 (ii) On or about 9 February 1996 representatives of the Commonwealth, BHP-IT and GEC Marconi including Les Cook, Mr Brent and Mr Wishart attended a demonstration of the emulator at DFAT's premises. I accept that the view was there expressed that the emulation software was considered satisfactory. After the demonstration Les Cook wrote to Mr Brent in the following terms: "The STUBS emulation software was demonstrated by Mr Peter Newton and additional information was provided by Mr Scott Preston. I confirm that, to the degree of detail presented, the emulation will be adequate to enable formal qualification testing of the release 3 software to be performed." There is no documentary evidence indicating that this letter was sent to Mr Wishart. Mr Wishart could not recall if he had read the letter. 404 (iii) GEC Marconi raised an invoice for the emulation software on 6 February 1996. Payment of $31,507.06 was authorised by Mr Brent and was made on 19 February 1996. 405 (iv) On 1 March 1996, Mr Goldsmith sent a facsimile to Mr Sharp which was copied to Roger Cooke. It opened with the following: "Regarding the letter about the Partial Emulation of STUBS:
(b) Applicable Principles There has been no disagreement between the parties as to the principles to be applied in resolving this matter, nor has any attempt been made by GEC Marconi to exploit such uncertainties as may still exist either in relation to the permissible subject matter of estoppel by convention: see the authorities discussed in Government Employees Superannuation Board v Martin (1997) 19 WAR 224 at 242ff; or in the principles governing the award of remedy in cases of equitable estoppel: see Giumelli v Giumelli (1999) 196 CLR 101. The disagreement between the parties is limited to whether the evidence is sufficient to support a finding of estoppel that would preclude GEC Marconi from asserting that at no time was BHP-IT relieved of its obligation under the Sub-Contract to supply STUBS. 425 For present purposes it is sufficient for me to refer to separate formulations of the principles governing equitable estoppel and estoppel by convention. They conveniently encapsulate the elements of each in brief propositional form. I do recognise, though, that there are differences to be found in judicial statements relating to both species of estoppel, these being occasioned in some measure by whether it should now be accepted that there is "a single overarching doctrine" of estoppel: cf Commonwealth of Australia v Verwayen (1990) 170 CLR 394 at 411. 426 In relation to equitable estoppel, Brennan J described its requirements in the following way in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 at 428-429: "In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise." Of estoppel by convention, the New Zealand Court of Appeal said the following in National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548n at 550: "The authorities show that for an estoppel by convention to arise the following points must be established by the party claiming the benefit of the estoppel (the proponent): (1) The parties have proceeded on the basis of an underlying assumption of fact, law, or both, of sufficient certainty to be enforceable (the assumption). (2) Each party has, to the knowledge of the other, expressly or by implication accepted the assumption as being true for the purposes of the transaction. (3) Such acceptance was intended to affect their legal relations in the sense that it was intended to govern the legal position between them. (4) The proponent was entitled to act and has, as the other party knew or intended, acted in reliance upon the assumption being regarded as true and binding. (5) The proponent would suffer detriment if the other party were allowed to resile or depart from the assumption. (6) In all the circumstances it would be unconscionable to allow the other party to resile or depart from the assumption." I should add that I consider that this statement of the law sufficiently identifies the law of this country as well, save that in Australia the assumption of law may well be limited to one relating to "private legal rights": Elsea Holdings Ltd v Butts (1986) 6 NSWLR 175 at 188ff; Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70 at 77; Government Employees Superannuation Board v Martin, above. This qualification is not of present moment in that, insofar as the conventional understanding in question was one of law, it related to private legal rights. 427 In light of GEC Marconi's factual submissions it is appropriate to comment, additionally, on the concept of "detriment" itself. 428 Whether one is speaking of estoppel at common law: see Thompson v Palmer, above, at 547; in equity: see Legione v Hateley 152 CLR 406 at 437; or under a unified doctrine: see Walton Stores (Interstate) Ltd v Maher, above, at 451ff; "detriment" or "material disadvantage" is an indispensable requirement. The place and purpose of the requirement in the law of estoppel were identified by Dixon J in Thompson v Palmer, above, in relation to estoppel in pais and were further elaborated by the same judge in Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 at 674-675. What His Honour there said, subject to one qualification I will notice, remains "instructive as an indication that the detriment against which the law protects is that which flows from reliance upon the deserted assumption": Commonwealth of Australia v Verwayen, above, at 415. 429 In Thompson v Palmer, his Honour said (at 547): "The object of estoppel in pais is to prevent an unjust departure by one person from an assumption adopted by another as the basis of some act or omission which, unless the assumption be adhered to, would operate to that other's detriment. Whether a departure by a party from the assumption should be considered unjust and inadmissible depends on the part taken by him in occasioning its adoption by the other party." Having illustrated the various ways in which a party might 'take a part' in occasioning the adoption of an assumption, Dixon J continued: "in each case, he is not bound to adhere to the assumption unless, as a result of adopting it as the basis of action or inaction, the other party will have placed himself in a position of material disadvantage if departure from the assumption be permitted." 430 In Grundt's case Dixon J enlarged on this. Speaking of the rules governing estoppel he said (at 674-675): "One condition appears always to be indispensable. That other must have so acted or abstained from acting upon the footing of the state of affairs assumed that he would suffer a detriment if the opposite party were afterwards allowed to set up rights against him inconsistent with the assumption. In stating this essential condition, particularly where the estoppel flows from representation, it is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the assumption upon which he proceeded were shown to be wrong and an inconsistent state of affairs were accepted as the foundation of the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice." 431 The qualification I foreshadowed is this. While detriment of the character to which Dixon J referred is necessary to establish an estoppel - "it would be strange to grant relief if such detriment were absent": Verwayen's case, at 415-416 - it is not the case, at least in relation to equitable estoppel, that if such detriment is there, the only way in which it will be averted by way of relief is by holding the party estopped to the assumption he or she induced: ibid, 415-416; Giumelli v Giumelli, above.
(c) Submissions and Conclusions: Representation/Understanding and Reliance 432 To reflect GEC Marconi's submissions I have separated the submissions and findings on representation/understanding and reliance, and those on detriment. 433 Put shortly BHP-IT's submissions are that if the conduct of the parties leading up to the 1 November agreement did not result in a binding Emulation Variation Agreement, it was sufficient to found an estoppel. Insofar as the estoppel is based on representations made by GEC Marconi, reliance is placed on the conduct and communications commencing with the early emulation discussions in December 1994, through the 25 July 1995 and 10 August letters, the original CR3049 and GEC Marconi's own schedule extension proposals, to the 26 September letter and then the 23 and 25 October letters. This evolving state of affairs led GEC Marconi to make in October what are described in BHP-IT's written submissions as the October 1995 representations. These were: "In October 1995, in the course of exchanges leading to the execution of CR3049, EASAMS represented to BHP-IT that, as BHP-IT was unable to supply STUBS (due to circumstances beyond its control), EASAMS would: (1) build emulation software and use it in lieu of STUBS so as to complete development, integration and acceptance testing of the ADCNET software without STUBS; (2) build the emulation software as part of an agreed change request, CR3049; (3) no longer assert or rely upon a contractual right to the supply of STUBS as CSI under the Sub-Contract." The common understanding, it is claimed, emerged from the same material but with the additional element of an already agreed CR3049. The common understanding was described in submissions in following fashion: "In BHP-IT's submission, the Court ought to find that by early November 1995, each of EASAMS, BHP-IT and DFAT believed that through their correspondence and by CR3049 they had reached an understanding that the cut-down emulator would be used to achieve acceptance testing in the absence of STUBS. So too, they believed that by this understanding they had resolved the difficulties associated with the non-supply of STUBS as CSI and had thereby agreed a means of completing the contracts. This understanding also carried with it a broader appreciation by all the parties that, in these circumstances, BHP-IT and EASAMS would forgo existing rights to demand the supply of STUBS as CSI under the Head and Sub-Contracts. Indeed, from 13/14 September onwards, all communications between the parties proceeded on the basis that STUBS would not be supplied. This common understanding was not in any way dependent on the parties identifying and agreeing upon, an alternative security gateway to replace STUBS. … All parties signed CR3049 without conditions." 434 The subsequent conduct of the parties from Mr Wishart's 22 November letter, through the change requests and contract amendments, to the demonstration and payment for the emulator, evidenced repetition of the representations, confirmation of the common understanding and the carrying into effect (reliance upon) the assumption induced by the representation/common assumption. 435 On the issue of reliance, BHP-IT contends I should find (i) that Mr Brent's understanding of the use of the STUBS emulator was as he stated it in evidence and (ii) that the actions he subsequently took, were taken in reliance on that understanding. 436 The Commonwealth's submission is that a like estoppel arose between BHP-IT and itself, that estoppel properly being characterised as an estoppel by convention. Parallel material is relied upon by the Commonwealth to establish both the understanding and its reliance upon it. 437 For its part GEC Marconi contends, optimistically, that the representation and conventional understanding were not sufficiently clear and unambiguous: cf Legione v Hately, above, at 436; Low v Bouverie [1891] 3 Ch 82, at 106. Focussing particularly on the 23 October 1995 letter, the submission goes on to indicate that the mere fact that Mr Brent received this or other communications does not prove that it had any relevant operative effect in his mind. From this GEC Marconi seeks to dismiss his oral and written evidence as reconstruction, again focussing in particular on the effects the 23 October letter were said to have on his mind in February 1996 and April 1996. I am invited to hold that prior to 23 February 1996 Mr Brent had no occasion to reflect upon whether the parties' obligations had been changed (informally or otherwise) so as to require acceptance testing with the emulator. 438 It is said, further, that insofar as the contractual documentation was concerned, Mr Brent's state of mind was not that the obligations in relation to STUBS had been removed. His evidence was only of an expectation that the obligations would be removed and that such removal would take place once agreement had been reached on a replacement for STUBS. Such a belief, if accepted, does not support the pleaded estoppel and is incapable of supporting any estoppel. It does not remotely approach an understanding on Mr Brent's part that the Contract with GEC Marconi was 'as good as amended'. He was responsible for drafting or approving Contract Amendments which specifically discounted any intention to vary any contractual obligations: eg CA23. He was aware at all times of the formal regime for contract variation established not only by the Contract, but by project documentation - in particular, the ADCNET Project Configuration Management Procedures. In short, if Mr Brent's evidence is treated as acceptable evidence of his state of mind rather than reconstruction, the state of mind is insufficient. 439 Little point would be served by my re-analysing the communications and conduct of the parties up to the time when the non-provision of STUBS was seriously raised as a default, for the purposes of indicating both the representations they would reasonably convey in the circumstances in which they were made or occurred, and the common understandings they engendered or reflected. I am entirely satisfied that the representations and common understanding alleged by BHP-IT have been made out on the evidence. I do not consider it necessary to add significantly to what I have already said in the preceding sections on the "Emulation Variation Agreement" and "Affirmation by Election". The one general comment I would wish to make is that there was an evolutionary process concerning STUBS and emulation from early in the ADCNET project. In consequence, more often than not the parties' communications and conduct require to be interpreted in light of what preceded them. This is particularly so of the 23 October CR3049 offer letter. 440 GEC Marconi state the obvious in proposing that a person's receipt of a letter does not necessarily prove it had operative effect on that person's mind. Nonetheless, as I have already indicated, I accept Mr Brent's evidence of his state of mind concerning the use of emulation for acceptance testing and that his understanding was formed at the time GEC Marconi's CR3049 offer was made and accepted and that it was confirmed by later events and correspondence. I do not consider his rambling account of the "streams of activity" that informed his understanding either as being contrived and artful or as being mere reconstruction. The process he described of the evolution, and then the consolidation, of his understanding reflected a process that made what was understood memorable even if the particular component elements of that process did not remain well remembered. Mr Brent did not have an invincible memory. Few people do. 441 As I have indicated, I consider it would be unsafe to accept his assertions that, when making both oral and written communications, he had particular documents in mind which confirmed his understanding at those times. I except from this, necessarily, his letter to Mr Haddad of 3 April which annexed Mr Wishart's 23 October 1995 letter. It may well be, as GEC Marconi submitted, that Mr Brent only reacquainted himself with this letter specifically and in detail prior to writing the 3 April letter. But that submission detracts in no way from the significance of the understanding he earlier arrived at and continued to entertain. It merely reflects a fallible memory as to its composite of sources. His understanding up until the 23 February meeting did not misrepresent either what previously had been represented to him by GEC Marconi, or what previously had been the parties common understanding. 442 I should add that the matter-of-fact character of the 26 February letter Mr Brent wrote to Mr Dart - it purported to be nothing other than a resumé of a meeting with a consequential proposal for an all party conference - is not of itself of any particular assistance in revealing what at the time was Mr Brent's understanding about STUBS emulation. I similarly do not consider that such contrast as there may be between Mr Brent's 1 April and 3 April letters to Mr Haddad throws useful light on the matter other than that both indicate that Mr Brent considered there was no substance to GEC Marconi's complaint. 443 However, I do accept that Mr Goldsmith's memorandum to Mr Sharp of 1 March cannot safely be treated as reflecting in some way a response to a view expressed by Mr Brent at the 23 February 1996 meeting on acceptance testing or at some further meeting after that date. It is more likely to relate to the then emerging dispute about what the emulator was to be used for. 444 I am unable to accept at all GEC Marconi's submissions that related to Mr Brent's view of the state of the contractual documentation and to the removal from it of STUBS-related obligations. My understanding when that evidence was given was, and remains, that in responding to Mr Simpkins SC's questions about "obligations relating to STUBS in the contract that remained unchanged", Mr Brent was referring to obligations other than the obligation to supply STUBS. It was those other obligations in the Schedules, the FRS, etc that were later to be varied - as some in fact were. I likewise do not consider that his evidence in either of the extracts quoted earlier were reconstructions. Mr Brent did reconstruct on a significant number of occasions. These were not instances of them, even though the first of the passages reveals an understandable glimmer of self-doubt about the matter. 445 I should add that I do not regard Mr Brent's awareness both of the formal regime for contract variation established by the Sub-Contract and by the project documentation as having any real bearing on what his state of mind was in relation to the obligation to supply STUBS and the use of emulation for acceptance testing. After the original CR3049 had been altered in its scope by the 26 September 1995 letter and Les Cook had indicated the basis for the proposed way forward, there ensued a disorder in the contractual documentation for which all parties bear responsibility. I merely instance the metamorphosis of one of the purposes of the original CR3049 from a full surface emulation to a "cut down" emulation without the issue of a new change request. I should add, that whatever the precise reason for Mr Brent's letter to Les Cook of 28 May 1996, his query concerning the subsistence of STUBS related obligations in the contract and subsidiary documentation reflects the disorder to which I have referred. 446 I have already indicated that I am satisfied that GEC Marconi made the representation to BHP-IT that was in substantially the terms referred to by BHP-IT in its written submissions (see above). Likewise I am satisfied that the conventional understanding of the parties from 1 November onwards into early 1996 was in substance such as was described in BHP-IT's written submissions. 447 I should make two further observations about these findings. First, I earlier concluded that I would find the emulation agreement to have been entered into in any event even if I were incorrect in my finding as to the Emulation Variation Agreement. A consequential matter arises from this concerning the representation and common understanding I have found. It is this. Insofar as the representation/common understanding related to STUBS emulation and its purpose, it would be contractual in any event. BHP-IT would then need only to rely upon its estoppel defence insofar as it related to the representation/common understanding concerning the abandonment of the requirement that STUBS be provided. The only reason I mention this is that the nature of the common understanding as to that matter was probably sufficient to found an estoppel by convention at common law (assuming the satisfaction of all other necessary requirements), in that it related to the parties then understanding of what were, and were to be, their private rights inter se in relation to the provision, etc, of STUBS: the authorities are conveniently collected in the judgment of Ipp J in Government Employees Superannuation Board v Martin,above at 242ff; see also National Westminster Finance NZ Ltd v National Bank of NZ Ltd,above. However, I will in what follows, treat the estoppel defence as if no part of the representation or common understanding had independent contractual effect. 448 The second observation relates to the nature of the representation and common understanding respectively: ie was the representation etc one of fact, of law, of intention, etc. This has not been a matter of contention, the parties seemingly sharing the view that if a sufficiently clear and unambiguous representation or conventional assumption is established that representation or assumption will be sufficient to found an estoppel, if not at common law, then in equity provided the other elements sufficient to found an estoppel in equity can be made out. There is nothing in GEC Marconi's submissions to suggest to the contrary, its principal attack on BHP-IT's defence being that it suffered no detriment in relying upon the representation or common understanding. 449 In this state of affairs I do not consider it necessary to analyse the precise nature of either the representation or the conventional understanding. I will treat the matter as if it was founded entirely upon estoppel in equity. Howsoever one characterises the component elements of the representation or common understanding as embodying assumptions of fact, of law, of intention, etc, the actual and/or assumed "state of affairs": cf Waltons Stores (Interstate) Ltd v Maher, above, at 415-416; the representation made and the common understanding held was a sufficient platform to found an estoppel in equity: Legione v Hateley (1983), above, at 435-437; Waltons Stores (Interstate) Ltd v Maher,above at 406; 428-429; 458-459; Commonwealth of Australia v Verwayen,above, at 413; Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 at 472; Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 at 610; and see generally Dal Pont and Chalmers, Equity and Trusts in Australia and New Zealand, 298-300 (2nd ed). 450 Turning briefly to reliance, it is in my view too clear for contest that the understanding entertained by Mr Brent did in fact provide the basis for actions subsequently taken by BHP-IT in relation to its continuing performance both of the Sub-Contract and of the Head Contract. That understanding was a consequence both of what was represented by GEC Marconi and of what was commonly understood at the time by the Commonwealth, BHP-IT and GEC Marconi as providing the explanation for what was being, and was to be done. It is unnecessary to recount again the steps taken by BHP-IT from its making of its own parallel CR3049 offer to the Commonwealth in consequence of GEC Marconi's CR3049 offer to it, down to the ultimately abortive CR3015. 451 The remaining question is whether, by so acting, BHP-IT placed itself in a position of material disadvantage should GEC Marconi be permitted to depart from the understanding relied upon.
(d) Findings and Conclusions: Detriment 452 I have already referred to the two matters of detriment pleaded by BHP-IT ie that (i) it did not require the Commonwealth to provide STUBS under the Head Contract; and (ii) it did not serve notices of breach on the Commonwealth under the Head Contract until 11 April 1996 and did not negotiate a full-time and materials variation to the Head Contract. I have also referred to the two matters of "prejudice" raised by Mr Brent in his witness statement ie that (a) BHP-IT continued to perform both contracts and did not take action in relation to the non-supply of STUBS; and (b) it may be exposed to liability to the Commonwealth if the contract changes made in the Head Contract were not mirrored in the Sub-Contract. 453 GEC Marconi's original written submissions dealt with all four of these matters, contending in each instance that, when regard is had to the facts, they reveal no relevant detriment. The essence of GEC Marconi's contention is that (i) there is not the slightest basis for inferring that DFAT would have provided STUBS if BHP-IT had sought it; (ii) Mr Brent did not identify specific actions BHP-IT would have taken instead of continuing to perform the two contracts so that, at best, the alleged "lost opportunities" were no more than a matter of speculation; and (iii) notwithstanding the contract variations, there were no material differences between the two contracts so that BHP-IT's position vis-ŕ-vis the Commonwealth continued to mirror that of GEC Marconi vis-ŕ-vis BHP-IT. 454 The additional matters of detriment raised by BHP-IT in its written submissions (to which I earlier referred) were: "(1) BHP-IT remains unpaid for the work it performed under the Release 3 contract in 1994, 1995 and 1996; (2) BHP-IT incurred costs in labour and resources in resuming the project following EASAMS' departure on 10 December 1996; (3) BHP-IT had to recommence the ADCNET project in December 1997 for the same price it had agreed in 1994 under the Head Contract, thereby being denied the opportunity to price this project at commercial prices appropriate for that time; (4) EASAMS refused to pay BHP-IT's invoices for the labour BHP-IT provided to EASAMS under the Sub Contract; (5) BHP-IT is exposed to damages claims from the Commonwealth." As to the last of these, it is claimed that, even if the Commonwealth is unsuccessful for the same reason that BHP-IT is unsuccessful in its defences to GEC Marconi's claim, BHP-IT will nonetheless incur costs in defending the claim (as is now the case) so that detriment has already been suffered. 455 In its reply submissions, GEC Marconi has contended that, properly analysed, none of these matters constitutes relevant detriment for estoppel purposes. The objection that is common to the first four matters is that the alleged detriment has not been shown to be the consequence of any reliance by BHP-IT on the representation or common understanding. As to the fifth matter, it is said that in deciding to defend the Commonwealth's claim, BHP-IT has not altered its position to its detriment. 456 Before indicating my own view on the issue of detriment, I should indicate that it has not been suggested by either party that, if the grounds for an estoppel have been established, the proper remedy should be other than that GEC Marconi be prevented from acting inconsistently with what it represented or with the common understanding. 457 It is unquestionable that, had BHP-IT been informed of what GEC Marconi now contends was the true state of affairs - ie the obligation to supply STUBS remained and that the emulator would not be used for acceptance testing - BHP-IT would not have acted as it did. As I will suggest below, such a disclosure by GEC Marconi would have produced a state of affairs requiring a quite different response from that in fact made by BHP-IT and then the Commonwealth on, and from, November 1995. The matter I would emphasise, though, is that BHP-IT's detriment case is not founded simply on inaction (hence the loss of an opportunity) resulting from its relying on GEC Marconi's representation and the common understanding: on "lost opportunity" see Mortgage Acceptance Nominees Ltd v Australian Thoroughbred Finance Pty Ltd (1996) 69 SASR 302 at 308-309; Austral Standard Cables Pty Ltd v Walker Nominees Pty Ltd (1992) 26 NSWLR 524 at 540; Dal Pont and Chambers, above, 309-310. Rather the matter is one in which, though action in reliance was taken by BHP-IT, different action would of necessity have been taken had the true state of affairs been known. 458 It equally is not open to question on my findings that BHP-IT took significant steps in the performance both of the Head Contract and of the Sub-Contract in reliance upon GEC Marconi's representation and on the common understanding it shared with GEC Marconi and the Commonwealth. That reliance continued for around four months before BHP-IT became aware there was a serious issue of default being raised by GEC Marconi on account of the non-provision of STUBS. The question is whether, because of such action, BHP-IT would suffer real detriment if the assumption it relied upon could later be falsified by GEC Marconi? To anticipate matters, the answer to this must be yes. 459 To appreciate the significance of BHP-IT's action in reliance, it is important to understand what would have been the state of affairs in late October/early November 1995 had GEC Marconi then revealed that the obligation to provide STUBS remained, that BHP-IT remained in breach, and that the emulation would not be used for acceptance testing. Its so doing would have signalled a rejection both of Les Cook's 26 September 1995 "way forward" proposals and of the known purpose of CR3049. In this state of affairs negotiations to vary or to renegotiate the ADCNET contracts would have been inevitable. One can only speculate as to what the probable or possible outcomes of those negotiations might have been, although it is likely that they would have been influenced somewhat by the cooperative and long-standing character of the relationship of the three parties and by GEC Marconi's deteriorating financial position in relation to the contract. What properly can be inferred is that that state of affairs would have required action by BHP-IT given its exposure to GEC Marconi, and that BHP-IT would at that time have made commercial judgments as to how best to conserve its interests given the Commonwealth's failure to supply STUBS. This may have involved the negotiation of a time and materials variation to the Head Contract (as pleaded in BHP-IT's defence). It may not. 460 What it would not have involved was BHP-IT committing itself to a course of action founded upon the premise that STUBS was not required to be provided and that the emulation would be used for acceptance testing. I accept, in consequence, the burden of Mr Brent's statement in his fourth witness statement that BHP-IT continued to perform its obligations under each of the Head Contract and the Sub-Contract and took no action in relation to the non-supply of STUBS in circumstances where, but for the assumption on which it relied, it would not have done so. 461 Turning to actions that were taken in reliance upon the representation and the common understanding, BHP-IT in fact did commit itself to courses of action that were predicated upon the continuing correctness of that representation and common understanding. It made representations and shared an understanding with the Commonwealth that replicated the representations made by, and the understanding shared with, GEC Marconi. GEC Marconi was aware of this. The Commonwealth now founds its estoppel defence against BHP-IT on the representation so made etc. Equally it agreed with either the Commonwealth or GEC Marconi a number of similarly premised change requests the most significant of which being CR3049 (but also CR3060 and, until aborted, CR3015). More generally, it continued to perform its functions and obligations under both the Head Contract and the Sub-Contract. 462 If GEC Marconi was able to falsify the assumption on which BHP-IT relied, several consequences would follow. First, it would place BHP-IT in the position of having made a representation to, and having shared an understanding with, the Commonwealth for the purposes of the Head Contract which on its own evidence it believed represented the true state of affairs (it relied on their accuracy for the purposes of the Sub-Contract) and from which it could only resile if the Commonwealth, for some reason, was unable to establish or rely upon its estoppel defence. Secondly, the agreed change requests and actions taken in relation to them would be stripped of their rationale and purpose if they were to be severed from the assumption that informed them. Thirdly, these actions as also the continuing performance of the two contracts, occurred across a four month period and were taken in relation to a contract with GEC Marconi under which BHP-IT could not reasonably have expected there to be any continuing risk to it in consequence of the non-provision of STUBS. 463 These various consequences are sufficient to make out the detriment required to found BHP-IT's estoppel claim. It is, in my view, unsurprising that BHP-IT has not made lengthy submissions on the issue of detriment. The essence of its case was put by Mr Young QC as being that, from October/November 1995, BHP-IT suffered positive detriment in taking courses in that period in reliance on the assumption it entertained and negative detriment in failing to take actions it might otherwise then have taken. The detriment suffered, moreover, was ongoing because BHP-IT adhered to its contract with the Commonwealth and sustained losses in so doing. It is unnecessary to consider whether the actual losses relied upon in the submissions and with which GEC Marconi takes objection can individually be said to constitute detriment for present purposes. What I would emphasise, though, is that GEC Marconi's resiling from its representations and the common understanding did not - and could not - result in BHP-IT having in turn to resile from the representation it made to, and the common understanding it shared with, the Commonwealth, or otherwise to take action adverse to the Commonwealth. It had its own commercial interests to consider. It changed its position by committing itself to a course of action under the Head Contract in November 1995. It was entitled to adhere to that course notwithstanding GEC Marconi's resiling. In this sense, as Mr Young QC submitted, it properly can be said to have suffered ongoing detriment. 464 I should acknowledge that not all of the matters to which I earlier referred as constituting the detriment suffered by BHP-IT were the subject of explicit submission by it. GEC Marconi alone has addressed on the alleged insufficiency of the "lost opportunity" to take action referred by Mr Brent. The Commonwealth alone has referred to its own estoppel defence and its effect on BHP-IT. Nonetheless I do not consider there is anything unfair or impermissible in dealing with BHP-IT's detriment in the manner in which I have. I have done no more than enlarge upon what BHP-IT has submitted in general terms. 465 The final question is whether it would be unfair and unconscionable for GEC Marconi either to resile from what it represented and from the common understanding or to rely on the non-supply of STUBS as a breach of the Sub-Contract. Having regard (a) to the unambiguous and continuing representations GEC Marconi made; (b) to its knowledge of BHP-IT's actions in reliance both in relation to it and to the Commonwealth; (c) to the length of time in which it permitted those actions to occur before signalling the "default issue", and (d) to the character of the detriment suffered by BHP-IT, the question admits of only one answer. It would be unconscionable for GEC Marconi so to resile. In consequence it is unable to rely on the non-provision of STUBS as a breach of the Sub-Contract. 466 Assuming my conclusions both on variation and affirmation were incorrect, BHP-IT would nonetheless be able to make out an estoppel defence insofar as it related to an alleged breach of contract occasioned by the non-provision of STUBS.
WAIVER 467 The terminology of waiver has been used for a number of purposes and to a number of different ends in this proceeding. Given the conclusions I have reached on "The Emulation Variation Agreement", "Election to Affirm" and "Estoppel" I do not intend to deal with the "waiver defences" in any detail or, in some instances, at all. 468 I preface what I have to say with the following observation. There is no need in this proceeding to analyse the independent province occupied by the doctrine of waiver that is distinct from the respective provinces of estoppel and election: but see Commonwealth of Australia v Verwayen (1990) 170 CLR 394; H K Lücke, "Non Contractual Arrangements for the Modification of Performance: Forbearance, Waiver and Equitable Estoppel" (1991) 21 WALR 149; Chitty on Contracts, vol 1, para 23-045 (28th ed); The Law of Contract, s2.99 (1999); Farnsworth, Changing Your Mind, Ch 16; Farnsworth, Contracts, s8.5 (3rd ed); Wilken and Villiers, Waiver, Variation and Estoppel, Ch 4; cf Uniform Commercial Code, s2-209(5). Sufficient has been said in these reasons on estoppel and election so as to indicate that waiver has a very minor possible role in the defence raised by BHP-IT. 469 BHP-IT has raised waiver in two ways. First, it is said that in the circumstances, GEC Marconi waived its right to insist upon the cl 45.1 writing requirement for the Emulation Variation Agreement. Given what I have said on the efficacy of that agreement, and on GEC Marconi being estopped in any event from setting up the lack of writing, I do not consider it necessary to deal with this waiver claim. 470 Secondly, relying upon the same matters particularised to make out the defences so far considered, BHP-IT has pleaded that GEC Marconi waived or dispensed with BHP-IT's obligation to deliver STUBS equipment and associated software as CSI and substituted STUBS emulation software therefore as an alternative mode or manner of performance. This submission attempts to build upon the observation of Williams J in Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at 244 that confirm the efficacy of an arrangement relating to the mode of performance of an existing obligation which is not intended to substitute a new obligation for that obligation. Given my earlier conclusions, I refrain from expressing a view on this submission other than to observe that it appears to be a particularly optimistic one. 471 In oral submissions DFAT propounded a quite distinct "waiver" defence that presupposed there was no Emulation Variation Agreement. It relates in an important way to GEC Marconi's alleged inability to complete the contract because it could not demonstrate all of the "testable shalls" in the FRS in the absence either of an agreed variation to the FRS or of waivers of the particular requirements that could not be demonstrated. And it has an attractive simplicity. 472 Put shortly, the primary submission is that by refusing to supply STUBS, the Commonwealth (hence BHP-IT) renounced its right to insist upon GEC Marconi's demonstration of the STUBS-dependent testable shalls of the FRS, those requirements embodying specifications made by the Commonwealth to suit its own needs. Cast in relatively conventional waiver language, the submission is that by its own unilateral act (ie in refusing to supply STUBS) the Commonwealth (and BHP-IT) renounced irrevocably the right to have the STUBS-dependent FRS requirements demonstrated. 473 As a variant on this, the Commonwealth has gone on to submit that, by agreeing to build the emulator, GEC Marconi acted upon the waiver because the emulator could not demonstrate the STUBS dependent requirements. 474 As I earlier indicated, there is an obvious attraction in the primary submission. In the usual case, it would prevent a contract breaker from exploiting to its own advantage and to the other party's prejudice the state of affairs created by its breach. I say in the usual case, because the curiosity in this matter is that it is the party not in breach that is seeking to insist on that state of affairs. 475 While I cannot accept in its entirety the submission put, I agree with its general thrust. I accept as a matter of principle that, unless and until the Commonwealth (and BHP-IT) have acted so as to cure the breach of contract arising from the non-provision of STUBS, then, questions of estoppel and election apart, neither could insist upon GEC Marconi having to demonstrate the STUBS dependent requirements of the FRS. 476 I do not think it necessary to fit this conclusion within the doctrine of unilateral waiver. For my own part I regard the preclusion from so insisting upon the FRS requirements as consequential contractual effects of the breach of contract occasioned by the non-provision of STUBS. Neither the Commonwealth nor BHP-IT could reprobate, then approbate, the STUBS requirement. 477 A different route to the same result may well be found in the Mackay v Dick (1881) 6 App Cas 251 duty to cooperate. It was well understood by the parties to the ADCNET contracts that, in the absence of STUBS, emulation could be used for acceptance testing. In the state of affairs created by the breach of contract, emulation could have been so used. I merely indicate without deciding that it well may have been the Commonwealth's and BHP-IT's obligation in the circumstances to perform the co-operative acts necessary to enable acceptance testing (eg by modifying the FRS to remove STUBS dependent requirements): cf Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288 at 298.
THE PROPER CONSTRUCTION AND THE APPLICABILITY OF SUB-CLAUSES 40.8 and 40.9 478 If the failure to provide STUBS was a breach of contract, it was not, so BHP-IT submits, such a breach as would have entitled GEC Marconi to resort to its right to terminate under cl 40.8 and 40.9. This submission raises two issues. The first relates to the proper construction of cl 40.8 and cl 40.9. The second is whether, in light of that construction, the non-provision of STUBS was a breach of such character as enlivened GEC Marconi's right to resort to those sub-clauses.
(a) The Issue of Interpretation 479 Both the Sub-Contract and the Head Contract made separate provision for termination by the "Customer" and the "Contractor" respectively. Because submissions have been advanced in light of the alleged differences between the separate regimes, it is necessary to set out each in full. 480 In the Sub-Contract, termination by the Contractor (ie GEC Marconi) could be effected under the following provisions: "40.8 Where the Customer is in breach of an obligation under this Contract so that there is a failure by the Customer to perform this Contract, the Contractor may, by notice in writing to the Customer, specify that breach and where that breach is capable of being remedied require the Customer within 32 days of receiving such notice to remedy that breach or commence appropriate action to remedy that breach. Emphasis added 40.9 Where the Customer has not: (a) remedied the breach referred to in subclause 40.8 within 32 days of receiving a notice (including because the breach was incapable of being remedied); or (b) commenced appropriate action to remedy that breach within 32 days of receiving a notice and remedied the breach within a reasonable time after that period has elapsed; the Contractor may, by notice in writing to the Customer, terminate this Contract without prejudice to any right of action or remedy which has accrued or which may accrue in favour of either Party." 481 The regime that applied to termination by the Customer (BHP-IT) was as follows: "40.1 If the Contractor is in default under this Contract, the Customer may, without prejudice to any right of action or remedy which has accrued or may accrue in favour of either Party, by notice in writing to the Contractor, specify the relevant default and, where such default is capable of being remedied, require the Contractor within 28 days of such notice to remedy or commence appropriate action to remedy the default promptly. 40.2 For the purposes of this clause, the Contractor will be in default under this Contract where the Contractor fails to perform or observe any obligation or undertaking to be performed or observed on its part under this Contract. Emphasis added. 40.3 Where: (a) the Contractor has received a notice under subclause 40.1 and fails to take appropriate action in response to that notice, or, having commenced appropriate action within 28 days, fails to continue and complete such action in a satisfactory manner and with all reasonable speed; or (b) in circumstances where the default is not capable of being remedied, the Contractor has either not claimed an extension of time or other waiver or, if it has, the Customer has determined that an extension of time or waiver cannot be justified; the Customer may by notice in writing require the Contractor to show cause, to the satisfaction of the Customer, why the whole of this Contract, or any part of it that is specified in the notice, should not be terminated by the Customer pursuant to this clause. 40.4 A notice to show cause under subclause 40.3 shall: (a) set out the circumstances which entitle the Customer to issue the notice; and (b) specify the time and date by which the Contractor must show cause, which time shall not be less than 6 clear days after the notice is given to the Contractor. 40.5 The Customer shall be entitled, by notice in writing to the Contractor, to immediately terminate this Contract in whole or in part, without prejudice to any right of action or remedy which has accrued or which may accrue in favour of either Party, where the Contractor: (a) fails, within the time allowed, to show cause to the satisfaction of the Customer in accordance with a notice under subclause 40.3; …" 482 Put in short form the controversy between the parties is whether, as BHP-IT contends, the type of breach envisaged by cl 40.8 was one of a repudiatory character, or, as GEC Marconi submits, it was simply any breach of an obligation under the Sub-Contract. The language of cl 40.8 that fuels this controversy is to be found in the words "so that there is a failure by the Customer to perform this Contract". BHP-IT submits these words qualified the earlier terms "[w]here the Customer is in breach of an obligation under this Contract" - and qualified them by requiring the breach to be of a particular character, ie repudiatory. GEC Marconi submits that the words were tautologous in that they said no more than that a breach of any obligation under the Sub-Contract would constitute a "failure to perform this Contract". 483 Such support as each party seeks to derive from the separate regime applying to termination by the Customer turns upon whether the apparent differences between the two were differences of substance (BHP-IT) or merely of form and expression without self-evident purpose (GEC Marconi). In particular GEC Marconi submits that "the failure to perform" the contract in cl 40.8 expressed the same concept as the failure "to perform any obligation or undertaking" in cl 40.2. 484 The construction for which GEC Marconi contends is not one, it says, which is unreasonable notwithstanding that any breach could trigger cl 40.8 no matter how insignificant or technical. The terms of the Sub-Contract were such, in all cases of breach, as to give BHP-IT the opportunity and time either to remedy the breach or to propose a contract variation to vary or eliminate the obligation in question. 485 It is unnecessary here to refer in any detail to the canons of construction to be applied in construing commercial contracts other than to note the following statements of principle which, for convenience, I respectfully reproduce verbatim. (1) "The language of a term is generally assigned its natural and ordinary meaning, read in the light of the contract as a whole but where it is ambiguous surrounding circumstances may be taken into account in assigning the presumed meaning. The surrounding circumstances include the matrix of mutually known facts, and the background, object, context and commercial purpose of the transaction, in the objective sense of what reasonable persons in the position of the parties would have had in mind: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (at 347-352); Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd ([1990] VR 834 at 844-850); Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Insurance Cases ¶60-853 at 75,343." Spunwill Pty Ltd v BAB Pty Ltd, above, at 299, Santow J. (2) "It is well established that the task of construction of a written instrument requires the whole of the instrument to be considered (Re Media Entertainment and Arts Alliance; Ex parte Hoyts Corporation Pty Ltd (1993) 178 CLR 379 at 386-7). A corollary is that there is a presumption against surplusage, although it is not a strong presumption in the light of modern drafting techniques involving standard form commercial documents (cf Lewison, The Interpretation of Contracts 2nd ed, 1997 s6.03)." Big River Timbers Pty Ltd v Stewart (1999) 9 BPR 16,605 at 16,607, Mason P; see also Chitty on Contracts, vol 1, para 12-075 (28th ed). (3) "[I]f detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense." Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201; see also Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 at 313-314; Minchillo v Ford Motor Company of Australia Ltd [1995] 2 VR 594 at 609. 486 It is obvious that cl 40 of the Sub-Contract is not in some respects a happily drafted clause. While contending that the language of cl 40.8 is clear and unambiguous, Mr Simpkins SC for GEC Marconi, nonetheless, has had to concede that there are differences in expression between the various sub-clauses of cl 40 which I am invited to accept are without any self-evident purpose. 487 If one were to disregard the fact that one was dealing with a clause in a termination provision, and if one read cl 40.8 in isolation both from the rest of cl 40 and of the Sub-Contract more generally, the meaning proposed by GEC Marconi might be arguable - though I rather doubt that the "so that" descriptive clause could be so easily disposed of even then. However, when read in its contractual setting, the language of cl 40.8 reveals an intention which does not require disregard of the descriptive clause and which reflects what would be expected of reasonable persons in the position of the parties. 488 In both cl 40.2 and cl 40.8 the contract purports to describe the type or quality of "default" or "breach" to which each respectively applies. The differences in descriptive formulae used, and in particular the use of the formula "fails to perform … any obligation" in cl 40.2, necessitates the conclusion that the cl 40.8 formula , in having abjured this language, envisaged a distinct and different state of affairs. I am satisfied for textual reasons that the parties did not intend in the descriptive clause simply to reiterate in different words that a breach of an obligation was a "failure to perform an obligation". It is not surprising that they did not. 489 Clause 5 of the Sub-Contract (which is entitled "Customer's Obligations") contains provisions such as the following: "5.1 The Customer shall take all reasonable measures to maintain the processing environment as constituted by the elements of the CSI. … 5.3 The Customer shall supply the CSI in accordance with clause 7 and shall perform its obligations specified in the Project Plan and the Implementation Plan pursuant to subclause 10.1. 5.4 The Customer shall manage the project risks which are identified as the Customer's responsibility under this Contract." 490 Even if one were to accept, as GEC Marconi submits, the practical unlikelihood that the contract would be terminated for breach of such generally stated obligations as those in cl 5.1 and cl 5.4, cl 5.3 is of a different order entirely. The obligations imposed on the "Customer" that were encompassed by cl 7 and cl 10 were enumerated in quite specific and detailed terms in Schedules 6, 7 and 8 of the Sub-Contract. It is, in my view, inconceivable that the parties would have intended that any breach of any one of this multitude of obligations would permit resort to cl 40.8. 491 The language used in cl 40.8 does not require me "to attribute to the parties an improbable and unbusinesslike intention": Mitsui Construction Co Ltd v Attorney-General of Hong Kong (1986) 33 BLR 1 at 14. It is reasonably capable of an interpretation which attributes to the parties an intention to provide for termination for breach by the Customer, on a sensible and businesslike basis: ibid. 492 I am satisfied, having regard to the type and terms of contract in question, that a reasonable interpretation which is open on the words of the Sub-Contract: J Kitchen & Sons Pty Ltd v Stewart's Cash and Carry Stores (1942) 66 CLR 116 at 124; and see Carter, "Termination Clauses" (1990) 3 JCL 90 at 99-100; and which accords with "business commonsense": Antaios Compania Naviera SA, above, at 201; is one that broadly equates a breach that amounts to a failure to perform the contract with a breach (other than an anticipatory breach) that would justify termination at common law. I except anticipatory breaches as the language of cl 40.8 and cl 40.9 seems to envisage breach of an obligation the time for performance of which has arrived: cf Moschi v Lep Air Services Ltd [1973] AC 331 at 356. Qualifiedly then, I agree with BHP-IT's submissions. 493 I would add in support of the view I take that one historically important, and judicially sanctioned, category of circumstances which would permit discharge of a contract for breach was that formulated by Sir William Anson. It was for "failure of performance": see eg Anson, Law of Contract, 289 (8th ed); Heyman v Darwins, Ltd [1942] AC 356, at 397; Anson's Law of Contract, 539ff (27th ed); and see generally Chitty on Contracts, vol 1, paras 25,016 and 25,033ff (28th ed). Modern understanding of this category encompasses principally breaches of essential terms and of terms going to the root of the contract: see generally, Chitty, above, at para 25,033ff. For present purposes, I am prepared to accept that the parties would as well have intended that cl 40.8 extends to an actual breach of an obligation in circumstances evincing an intention not to be bound by the terms of the contract: for the difference at common law between repudiation and failure of performance, see Byrnes v Jokona Pty Ltd [2002] FCA 41 at para [70]-[80].
(b) The Applicability of Cl 40.8 and Cl 40.9 494 On the assumption that there was a subsisting breach arising from the failure to provide STUBS, the short question is whether there was, in consequence, a failure to perform the contract for cl 40.8 purposes. Though this, formally, is the central issue in GEC Marconi's case, it has not been the subject of particularly detailed submissions by the parties (the Commonwealth apart). GEC Marconi's submissions on this matter - as distinct from the interpretation of cl 40.8 - are notably sparse and are baldly assertive. 495 Much of the evidence that has some possible bearing on the question has been, or will be narrated, in other parts of these reasons. I do not intend to collect and repeat here that material. I have already described the purpose and evolution of the ADCNET project; the objective of replacing the IBM message switch; the role of boundary security in the project based on the use of sealers and gateways; DFAT's adoption of STUBS in 1993 as the preferred choice for boundary security; the execution of the ADCNET contracts in 1994, these having been prepared on the known basis that the Commonwealth would supply and be responsible for the functionality of STUBS; and that BHP-IT's (hence GEC Marconi's) responsibility would be to integrate the STUBS devices with the Release 3 software. 496 I will later deal with the knowledge BHP-IT and GEC Marconi had of the Commonwealth having no contract with AWADI for the supply of STUBS and their respective appreciations of the likelihood or otherwise of STUBS being provided: see "BHP-IT's Second Cross-claim". 497 Reference has been made to other breaches relating to the provision of STUBS (ie specifications and software) and to the stances taken in relation thereto; to the various proposals made for emulation including for acceptance testing; to GEC Marconi's proposals made prior to the cancellation of STUBS being announced to complete the contract without STUBS; and to the passage of time from that announcement until the first Notice of Breach was served. 498 There are only two additional factual matters to which I should refer. The first is that the integration of STUBS into the ADCNET software constituted only a very small part of the work to be performed by GEC Marconi under the Sub-Contract. Most of the Developed Software could be built and tested quite independently of the development of the STUBS interfaces. It is GEC Marconi's own evidence that of the over 2000 CSU's that made up the source code, only 4 CSU's could not be developed because of the absence of STUBS. 499 Secondly, there is documentary evidence which I accept that GEC Marconi was aware that the ADCNET system could be used by DFAT without STUBS. As Mr Goldsmith commented to Mr Sharp in a memo of 1 March 1996: "It is their risk". 500 In Part I of these reasons I have set out relevant provisions of the Sub-Contract, the Schedules, and contractual documentation which related to the provision of STUBS, GEC Marconi's obligations and to acceptance testing. I will not repeat these here. 501 Having referred to the state of GEC Marconi's submissions on this matter, I intend merely to express my own conclusions without detailed reference to the evidence or to the helpful submissions of BHP-IT and the Commonwealth. 502 First, I am not satisfied that the obligation to provide STUBS as CSI under the contract was an essential term (or condition) of the Sub-Contract. I accept (a) that a continuing objective of the ADCNET project was to replace the IBM message switch; (b) that, from early in the project, the boundary security adopted for the system was to be based on trusted sealers and gateways; and (c) that in 1993 STUBS was selected for that boundary security purpose and it was to be supplied by the Commonwealth. Nonetheless it was well-understood by all parties at the time the ADCNET contracts were entered into that GEC Marconi's contractual responsibility in relation to boundary security was to deliver software that would interface with STUBS and would be compliant with the STUBS SIS. The risk relating to the functionality of boundary security lay with the Commonwealth: it selected and supplied the device to be used. GEC Marconi's risk stopped at the interface. 503 The Head Contract and the Sub-Contract both reflected this understanding. GEC Marconi's central obligation was to build and deliver the Developed Software. That software had to be integrated with STUBS and with other CSI. The integration with STUBS was known to be, and was, only a minor part of the software development work (EASAMS had developed the FRS). The Sub-Contract itself contemplated the possibility that there could be changes to the CSI (a matter earlier discussed in relation to CR3060). It also contemplated that, if operational equipment was not available, a test harness would be used in acceptance testing. Although the method for interface acceptance testing had to be agreed, the contract thus contemplated that the "testable shalls" of the FRS could be demonstrated using a test harness even though that harness did not provide the substantive functionality of operating equipment. 504 I accept both that changes to the CSI and the methods of use of an emulator in acceptance testing needed to be the subject of agreement. My reason for emphasising these matters is that they assist in confirming what is otherwise apparent both from the contractual risk allocation concerning boundary security and from the minor dimensions of the work to be undertaken by GEC Marconi in relation to STUBS. This is that the STUBS related obligations were not essential to the Sub-Contract. As both BHP-IT and the Commonwealth submit, the Sub-Contract envisaged acceptance testing and delivery of the Developed Software with or without STUBS. I will refer below to GEC Marconi's submission that the Sub-Contract was unable to be completed without STUBS because of requirements in the FRS. 505 In Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 556-557, it was stated that: "In deciding whether a promise has the status and effect of a condition, courts are not too ready to construe a term as a condition and, at least where other considerations are finely balanced, will hold that a term is of such a kind that breach of it does not give rise to an automatic right to rescind. This approach is explained by a preference for a construction that will encourage performance rather than avoidance of contractual obligations." This is not a case where, in my view, the considerations are "finely balanced". But if it were, it would warrant the application of the constructional preference referred to. With an obligation having the relative size and significance to the ADCNET contract that the STUBS obligation had, this is a clear case in which preference should be given for "a construction that will encourage performance". 506 The STUBS obligation was not an essential term of the Sub-Contract. Neither did the failure to supply STUBS go to the root of the contract. It did not impose burdens on GEC Marconi, or deprive it of benefits of such seriousness or significance as to so change the character of the Sub-Contract that it can be said to be a commercially different bargain: see Byrnes v Jokona Pty Ltd, above, [75]-[80]. As I will indicate later in these reasons, GEC Marconi attempted to use the non-provision of STUBS so as to procure for its own benefit a commercially different bargain. 507 I need not enlarge upon this conclusion, other than to say that, apart from the delays to be endured prior to the announcement of STUBS cancellation (and these were to be the subject of delay claims) the non-provision of STUBS did not have a particularly significant adverse effect upon GEC Marconi. As GEC Marconi's Systems Architect wrote in a report of 15 July 1996: "Non-delivery of the STUBS device and use of the STUBS emulator does have an impact on the project. It will cause us to rework a number of documents and make a number of code changes. Compared to the other problems on the project however, it is fairly minor." 508 The failure to provide STUBS was, as I indicated earlier in these reasons, a "once-and-for-all" breach. BHP-IT's conduct in the matter could not warrant a finding of repudiation. It did not evince an intention that it was no longer to be bound by the contract or that it would only fulfil the contract in a manner substantially inconsistent with its obligations and not in any other way: Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 33, 40; Honner v Ashton (1979) 1 BPR 9478. The Commonwealth, hence BHP-IT, made plain that it would not supply STUBS. But otherwise it sought and promoted the completion of the contract. There was nothing repudiatory in its, or BHP-IT's, actions. If repudiation of a contract is "a serious matter, not to be lightly found or inferred": Ross T Smyth & Co Ltd v TD Bailey & Son [1940] 3 All ER 60 at 71; no basis at all exists here for even contemplating such a finding. 509 As I earlier indicated, GEC Marconi has submitted that the ADCNET contract could not be completed because there were "testable shalls" in the FRS that could not be demonstrated in the absence of STUBS and no amendments to, or waivers of, these requirements were made. I have dealt with this matter in a number of contexts already. I do not intend to repeat what I have said other than to note yet again that I reject the submission. 510 BHP-IT has separately submitted by way of defence that it had in any event remedied its breach before February 1996. It is unnecessary to consider this submission.
NON-PAYMENT FOR MILESTONE 4000 511 The second ground upon which GEC Marconi relied to terminate the Sub-Contract was BHP-IT's failure to pay the invoice for Milestone 4000. That milestone related to the Test Readiness Review. By way of defence, BHP-IT claims that its refusal to pay was justified in the circumstances and that in any event it did not evince any intention to no longer be bound by the provisions of the Sub-Contract. 512 The issues raised here are of two types. The first are ones of construction. To set the scene for them it will be necessary to make reasonably extensive reference both to the Sub-Contract and to a deal of subordinate documentation. The second type of issue is essentially factual in character. Again it will be necessary to make lengthy reference to the evidence and particularly to technical evidence. I will deal with the two separately. 513 I should say that, for reasons I later give: see Part III: The Repudiation Claim; there is a distinct air of unreality that envelops the claims made in this section. I would merely note here what is clear beyond contention. When GEC Marconi rendered its invoice for Milestone 4000 it was, as its senior representatives recognised, engaged in a ploy to increase commercial pressure on BHP-IT and DFAT. Mr Sharp, who participated in the decision to render the invoice, had no belief that all of the money for Milestone 4000 was due.
(a) Relevant Sub-Contract Provisions 514 Clause 10 of the Sub-Contract obliged the parties to perform their obligations in accordance (inter alia) with the Implementation Plan of Schedule 8. Clause 1 of that Plan, insofar as presently relevant, was in the following form: Deliverable Deliverable Customer's Date Contract Payment Reference Description Responsibility Submitted Acceptance Amount Ident. To Customer Date (AUD) 1000 Project Mobilisation Nil Not Contract 1 250 000 Applicable Signature 2000 Preliminary Design Review 08/11/94 subject to 1 250 000 Review Approval acceptance . Final Architecture Approval on Design Document Review achievement . Acceptance Test Plan Review of milestone . Preliminary Software 5000 Design Document - HCI relevant material - Non HCI material . Database Design Document (Logical Design 3000 Critical Design Review Approval 31/03/95 subject to 1 375 000 . Detailed Software Review acceptance Design Document Approval on - HCI relevant Review achievement material of milestone - non HCI relevant 5000 material . Test Descriptions (Test Cases) . Database Design Document (Physical Design) 4000 Test Readiness Review Approval 06/09/95 subject to 1 250 000 . Test Descriptions Approval acceptance (Procedures) Review 0n . Acceptance Test Review achievement Data of milestone . Software 5000 Development System Design Document . Test and Acceptance System Design Document 5000 Canberra system Acceptance 15/01/96 15/01/96 500 000 Developed Software … …
… 1.2 Those deliverable's identified in Table 8.1 within the column titled "Customer's Responsibility", as subject to review shall be reviewed by the Customer in conjunction with the Contractor during the formal review process conducted by the Contractor. 1.3 Those deliverable's identified in Table 8.1 within the column titled "Customer's Responsibility" as subject to approval shall be subject to the conditions as set out in subclause 9F.2": Emphasis added. 515 There are two comments to be made in passing about the above. The first is to note that there is a dispute between the parties relating to the proper construction of the words "approval" and "review" in the above Table. The second is to draw attention to the reference in cl 1.2 to "the formal review process". As will be seen below, a quite distinct issue exists as to the significance of this reference. 516 Clause 9.F of the Sub-Contract dealt with matters of administration and procedure in the "Conduct of Documentation Review". It provided: "9F.1 ADMINISTRATION 9F.1.1Where the Customer is required to review Documentation prepared by the Contractor for the purposes of commenting (reviewing), approving or accepting that Documentation, the Contractor shall deliver the Documentation in hard copy to the Customer's nominated Lodgement Officer. The Customer's Lodgement Officer shall be responsible to formally receive the Documentation and, for its distribution to the appropriate officers of the Customer. 9F.1.2The Customer shall return the Documentation including any associated comments to the Contractor's Lodgement Officer who shall be responsible for formally receiving the Documentation and providing the Customer's comments to the Contractor's appropriate officer(s). 9F.2 PROCEDURE 9F.2.1During the period of preparation of deliverable Documentation, the Contractor shall keep the Customer and the Commonwealth informed at all stages while the Documentation is being prepared so that the Customer's and Commonwealth's personnel who will be assessing the Documentation for the purposes of subclause 9F.2.2 will have a reasonable knowledge of the content of the Documentation by the time the Documentation is delivered to the Customer for approval, acceptance or otherwise. 9F.2.2If the Customer has any objection to the Documentation provided by the Contractor it shall notify the Contractor promptly of any alterations it reasonably requires to be made to the same. The Contractor shall not unreasonably refuse to amend the Documentation to take account of the Customer's reasonable requirements. Where the Documentation complies with the Customer's Functional Specifications, amendments requested by the Customer may constitute a variation to the Contract." 517 There is a dispute between the parties as to when TRR was to occur, this dispute bearing as well on the proper meaning to be ascribed to the term "review" in the Table above. The provision of the Sub-Contract that is said to bear directly on this matter was cl 55. It provided: "The Contractor shall supply to the Customer Services and the Developed Software which comply with the standards specified in Schedule 3." Schedule 3 in turn stated that: "The Contractor will comply with the standards as set out in the Software Development Plan (reference number 1401.01 Version 1) and any subsidiary documents to that plan." A subsidiary document of the SDP is said by BHP-IT to have been the IPD Standard for Inspections, Reviews and Audits. It is necessary to refer both to that document and to the SDP, each of which was prepared by GEC Marconi. 518 First, the SDP. The "Document Overview" clause (cl 1.3) described the purpose of the SDP as being to define the development process to be applied to Phase II of the ADCNET project by the IPD team. That process was to be known as "Best Commercial Practice", a description which was elaborated upon in Appendix C to the SDP. In relation to "Formal Reviews in the Development Process", the Appendix described TRR as being mandatory and to be conducted at the end of the "Integration Testing Phase". A table in the SDP, which is reproduced as Schedule 3 to these reasons, identified when that phase would end. Clause 3.8 of the SDP provided: "Formal external reviews will be conducted during the development process in accordance with IPD Standard for Reviews and Audits … . The planned formal external reviews are: … iii. Test Readiness Review (TRR) - The TRR shall be held at the end of the Integration Testing phase, and shall be used to ensure that the system is ready for Acceptance Test." 519 The IPD Standard document described the purposes and processes of reviews (External and Internal) in some detail. It stated that the objective of the external review process was "to allow the customer to formally evaluate products created during a development phase that have been deemed as deliverable". In commenting generally on the review process itself, the document indicated that reviews should not be considered as a single point in time "as preparation starts weeks before and the review is not finished until all action items are satisfactorily completed": cl 3.5. The External Review process accommodated two stages, the first relating to the review meeting, the second, the follow-up. The former stage involved a "page-by-page walk-through" of the documents to be reviewed with "agreed actions" arising there from being noted on the "Review Action Sheet". At the end of this process (cl 7.6.2): ". The Reviewers then determine the review result and the Review Chairperson records this result on the Review Result Record. The review result can be either a 'Passed and Complete' (no follow-up action required), a 'Passed with follow-up action required' (as specified in the Review Action Sheet), or a 'Re-submit' (the product requires sufficient further work to merit another review process). For the last two a date should be recorded indicating when it is estimated follow-up action should be complete by, or the date for a rescheduled review respectively. … . On completion of the review meeting the Review Chairperson is to brief the Customer on the review outcome through a formal letter. The Review Chairperson is then to organise the review follow-up, if the review was not assessed as 'Passed and Complete'." 520 The purpose of the follow-up process was to complete satisfactorily all agreed review action items that had been marked in the Review Action Sheet. A series of steps was ordained, the last of which being described as follows (cl 7.6.3): ". When all action items are complete the Review Chairperson signs the Review Action Sheet and Product Issue Report as complete and files this on the products Development File. He then informs the Customer that the review process has been successfully completed." Clause 7.7 went on to provide "Exit Criteria" for the completion of an External Review which culminated in a Review Report being issued to the customer. Annexed to the IPD Standard document were the standard forms of the various documents (Review Action Sheet, etc) used in the review process. 521 The Sub-Contract made express provision for the making of payment for milestones. Clause 16, insofar as presently relevant, provided: "16.1 The Customer shall make progress payments in accordance with the milestone payment schedule in Schedule 8 upon the Delegate being satisfied on reasonable grounds that the supply of the Documentation, Developed Software or integration of that part of the System referable to that milestone payment meets the requirements of this Contract. … 16.3 When a payment is due under Schedule 8 the Contractor shall provide a correctly rendered invoice to the Delegate. 16.4 The Customer shall make payment within 21 Normal Working Days after receipt of a correctly rendered invoice. 16.5 An invoice is correctly rendered if: (a) the amount claimed in the invoice is due for payment." 522 Two issues arose out of this provision. The first was whether the amount claimed by GEC Marconi for Milestone 4000 was due; the second, assuming it was, was whether Mr Brent was justified in not making the payment for discretionary reasons envisaged in cl 16.1. 523 The final contractual matter to be referred to relates to the character of GEC Marconi's obligations relating to the SDP. In addition to cl 55 referred to above, cl 10.1 of the Sub-Contract required the parties to perform their obligations "in accordance with the Project Plan … [Schedule 7] and the Implementation Plan [Schedule 8]". Clause 2.2 of Schedule 7 obliged GEC Marconi, in performing its Project Management function, to "[ensure] that the provisions described in the Software Development Plan are implemented".
(b) Additional Factual Material 524 I refer to the following matters as they have been relied upon in BHP-IT's and the Commonwealth's submissions. 525 (1) Some number of versions of the SDP were prepared by GEC Marconi during the period 1994-1996. The operative version for present purposes was Version 3.3 and the SDP references in the preceding section were to that version. An earlier version of the SDP (Version 3.1) provided for TRR to be held just prior to integration testing (ie at the end of CSC Integration testing) and not after it as was the case with Version 3.3. 526 (2) In cross-examination Roger Cooke accepted that the purpose of TRR was to check that everything was in place for the system to be acceptance tested, and that the practice in his 30 year experience was that TRR occurred immediately prior to (Version 3.1) or immediately after (Version 3.3) integration testing. It is Mr Harris' evidence (he was responsible for updating the SDP) that he derived the Version 3.3 requirements for the TRR from a "Government Standards" document for software development (DOD-STD-2167A) that was a referenced document in both Version 3.1 and 3.3. 527 (3) On 5 December 1995 Les Cook wrote a letter to Mr Brent concerning TRR. It stated in part: "The relevant description from the SDP is that the 'Test Readiness Review shall be held at the end of the integration testing phase and shall be used to ensure that the system is ready for Acceptance Testing'. The Department considers that this means that completion of integration testing is a prerequisite for TRR. With the current development plan, this means that TRR should follow successful integration of build 5." 528 (4) The positions taken by GEC Marconi and BHP-IT in relation to TRR was evidenced in the following two letters. The first, from GEC Marconi, reflected the fact that not even Build 2 had by then completed the integration test phase. It proposed replacing Milestone 4000 with three separate milestones and apportioning the contracted for payment between these. It prefaced this proposal with the following: "There is a conflict in the contract baseline documentation regarding the conduct of the Test Readiness Review. The contractual deliverable's (sic) in the document which takes precedence, namely the contract, does not provide deliverable's (sic) to enable the TRR as the SDP requires until the final milestone." This proposal was rejected by Les Cook. BHP-IT's position on TRR was reflected in the response made by letter of 21 March 1996 to the invoice sent to it by GEC Marconi of 12 March 1996. Though of some length, this letter will be quoted in full to avoid the need for later repetition. "I have reviewed the contractual position on the issue of the Test Readiness Review (TRR) with the following results: · the contract (Agreement No ADC/001) between BHP-IT and EASAMS is comprised of the document itself, the schedules and documents which include the Functional Requirements Specification (FRS), the Architecture Description document (ADD) and the Software Development Plan (SDP); · Clause 2.1 of the contract defines the order of precedence; · Clause 55 of the contract states "The contractor shall supply to the customer services and the Developed Software which comply with the standards specified in Schedule 3 of the contract; · Schedule 3 of the contract states that the Contractor will comply with the standards set out in the Software Development Plan; · Schedule 7 of the contract is the project plan. Under the "Contractors scope of work" it states "WP1000 Project Management (ii) ensuring that the provisions describes in the Software Development Plan are implemented"; · Section 4.2.3 of the Software Development Plan states that DOD-STD-2167A Defence System Software Development shall be the basic design standard used; · Section 4.2 Software process of the Software Development Plan refers to Figure 4.1; · Figure 4.1 of the Software Development Plan Best Commercial Software Development Process defines the position of the TRR in the Software Development process after completion of coding and integration testing of all CSU's and all CSC's and is predicated on the availability of a favourable integration test report. This is the purpose of TRR, to ensure that the system is ready for final acceptance; · This is confirmed by Section 3.8 Formal External Reviews item (iv) which states inter alia that "the TRR … shall be held at the end of the appropriate Integration Testing phase, and shall be used to ensure that the system is ready for Acceptance Test; · Schedule 8 of the contract defines the payment milestones of which TRR is one; · Schedule 9 of the contract paragraph 2.2.1 states inter alia that "The qualification of the Developed Software shall be based on the adherence of the software development to the testing and quality provisions as defined in the Software Development Plan". The TRR is a testing and quality provision of the SDP. Thus there is no conflict between the contract and the Software Development Plan. The TRR as defined by the contract and the Software Development Plan requires that: · all test documentation be complete and approved; · all software development complete; · all integration testing be satisfactorily complete; · appropriate integration test reports be provided to support the contention that the system is ready for acceptance testing. As at the date of this letter none of the criteria defined above have been satisfied. The TRR is now more than six months late. Accordingly, I cannot authorise the milestone payment of $1,250,000, billed under your invoice 14248, dated 12 March 1996, until the requirements of the contract and the Software Development Plan are met."
(c) Submissions and Conclusions 529 By way of prelude to what follows, I would reiterate that the Table in Schedule 8 required that two documents - the Test Descriptions (Procedures) and the Acceptance Test Data - be "approved" and that another two - the Software Developed System Design Documents ("the SDSDD") and the Test and Acceptance System Design Document ("the TASDD") - be the subject of review. I would also note that the first two documents were in fact combined into one document entitled the Acceptance Test Descriptions ("the ATD"). 530 There are three issues of construction seemingly raised in the parties' submissions. I say "seemingly" as the first to which I refer seems only to have been put directly in GEC Marconi's reply to the Commonwealth's submissions. These issues are: (i) Subject to the Delegate being satisfied on reasonable grounds that the document submitted for a milestone met the requirements of the Sub-Contract, was the cl 16.1 payment obligation triggered by the mere delivery of those documents for "approval" or "review"? Or was "approval" or "review" a precondition of payment? (ii) What was required for there to be "approval" or "review"? (iii) Was the TRR referred to in Schedule 8 for Payment Plan purposes, the same TRR as referred to in the SDP for software development purposes?
(i) The cl 16.1 payment obligation 531 GEC Marconi's submission is, essentially, that the "Customer Responsibility" column of Schedule 8 does not stipulate a precondition for payment. Clause 16.1 speaks for itself. These submissions imply (a) that cl 1.2 and cl 1.3 of Schedule 8, in their references to deliverables "subject to review" and deliverables "subject to approval", have no significance in relation to the Payment Plan ordained by Schedule 8; and (b) that the reference in cl 16.1 to the "supply of the Documentation … [meeting] the requirements of this Contract" does not necessitate that the documents in question be "approved" or "reviewed" as the case may be. 532 Both BHP-IT and the Commonwealth submit that before payment is due under Schedule 8 all of the requirements for TRR must be met. And it is only then that an invoice for that milestone can be rendered under cl 16.3. 533 For my own part, I do not consider that the language of cl 16.1, read in light of cl 16 as a whole and of the Sub-Contract more generally, requires me to attribute to the parties an intention so improbable as GEC Marconi proposes. The documents that are to be supplied for TRR under the Schedule 8 "Delivery Schedule and Payment" plan are (i) contract deliverables and (ii) are required to be approved or reviewed by the Customer. Nonetheless the submission advanced is that the Customer is obliged to pay for what is to be a deliverable without being able to exercise its right of approval or review before it does so. 534 The clear contemplation of cl 16, when read in light of Schedule 8, was that a contracted milestone payment became due when the requirements of that milestone had been met. Clause 16.1 and cl 16.3 were not concerned with when a progress payment was due. They presupposed that. Rather their concern was with the manner in which (cl 16.3), and the conditions subject to which (cl 16.1), payment was to be made. There is nothing surprising in requiring the Delegate to be satisfied that the supply of the documentation referable to a milestone met the requirements of the contract. The Delegate may well not have been a participant in the review process - Mr Brent was not a participant on all of the TRR reviews - and in consequence may have needed to be satisfied that the documents supplied met the contract's requirements, (ie they were approved or reviewed by the Customer) before payment was made by BHP-IT.
(ii) The Meaning of "Approval" and "Review" 535 The need to attribute meanings to these terms in Schedule 8 arises because, at the very least, the TRR documents were required to be either approved or reviewed before it could be claimed that the requirements of TRR had been satisfied and the Milestone 4000 payment was due. I say "at the very least" as BHP-IT has submitted that there were other conditions to be satisfied before payment was due. 536 GEC Marconi's submission is that (i) all that the contractual process of "approval" required was the provision of an opportunity to BHP-IT to stipulate amendments to any of the documents identified in Schedule 8 as requiring approval; and (ii) the process of "review" required no more than that the documents to be reviewed be submitted to BHP-IT for comment. This submission is based in large measure on the construction GEC Marconi placed upon cl 9F1.1 and cl 9F2.2 of the Sub-Contract and the description given of "Documentation Acceptance" for the purposes of cl 3 of Schedule 9 of the Sub-Contract. 537 I do not intend to rehearse here the contentions of the parties in any detail. The key to the meaning of the two terms lies in Schedule 8 itself. Clause 1.2 of the Schedule specified that documents that were "subject to review" were to be "reviewed by the Customer in conjunction with the Contractor during the formal review process conducted by the Contractor": emphasis added. The formal review so envisaged was clearly the one the SDP required to be undertaken for TRR: cl 3.8. It was to be a formal external review and at least one representative from BHP-IT was required to be part of the review group for TRR. As I have indicated the IPD Standard document prescribed the manner of conduct of this type of review. Though cl 1.2 might seem to suggest that the "[review] by the Customer in conjunction with the Contractor" was to be a review within a review in that it was to take place "during the formal review process", the intention properly to be attributed to the parties was that there was to be only one review in which the Customer participated as a reviewing party. I would note as part of the objective framework of facts: Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 837; that early versions of the SDP which pre-dated the Sub-Contract envisaged a similar formal external review for TRR. Further, because the TRR external review was to be conducted in accordance with the IPD Standard, the review contemplated by cl 1.2 would only be completed in respect of a particular document when the TRR review of that document was completed in accordance with the requirements of the IPD Standard document. I will return to that Standard document below. 538 I should add I do not consider that cl 9F1.1 assists in the construction of Schedule 8. It opens with the words "[w]here the Customer is required to review Documentation … for the purposes of commenting (reviewing), approving or accepting that Documentation" etc. It is from this that GEC Marconi derives its submission that "review" means "comment upon". Clause 9F.1 has no greater purpose than to describe the machinery to be employed governing distribution of documents to the Customer, their retrieval and the proper communication of any comments made by the Customer. The use in that general setting of "reviewing" as a synonym for "commenting" is readily understandable. The word "review" as used in the specific context of Schedule 8, and its elaboration in cl 1.2 of that Schedule, leaves no room for the suggestion that it simply means "comment upon" in that context. 539 Clause 1.3 of Schedule 8 required that a document subject to "approval" was to be subject to conditions set out in cl 9F.2. All I need say of this is that I agree with the Commonwealth's submission that that clause was purely procedural in character. For the purposes of cl 1.3 of Schedule 8, cl 9F.2 provided the means to enable the Customer to exercise its contractual responsibility to approve the documents concerned. It did not stipulate what was to constitute approval. 540 I again agree with the Commonwealth that the word "approval" was intended to have its ordinary natural meaning. It required a positive act on the customer's part that "assented to", "confirmed" or "approbated" the document in question - that "pronounced [it] to be good": see Shorter Oxford English Dictionary, "approval", "approve". I should add without elaborating on the matter that I do not consider that the provisions of Schedule 9 relating to document acceptance affect the conclusion at which I have arrived. I agree with the Commonwealth's submissions. 541 The sources of the requirements that both the Acceptance Test Data and the Test Descriptions (Procedures) be approved individually by the Customer were to be found in cl 9E.4.1 and cl 9E.5.1 of the Sub-Contract. As I have noted, these two documents were combined into the ATD. That document (because it involved Test Descriptions) had to be approved by the Customer "prior to the commencement of the Acceptance Tests": cl 9E.5.1. Given that the TRR specified in the SDP was to be conducted after integration testing in anticipation of acceptance testing: SDP cl 3.8iv; it is proper to infer that, for the purposes of the Schedule 8 Milestone, it was envisaged that that approval would be signified on and by successful completion of the TRR. In saying this, I am not necessarily implying the Customer may not have been able to require alterations to the ATD after TRR as a matter of contractual right.
(iii) The Schedule 8 TRR and the SDP TRR 542 I have already indicated my view above that documents required to be reviewed or approved for Schedule 8 purposes had to be reviewed as part of the formal external review for the TRR mandated by the SDP. The corollary of this is that the Schedule 8 Payment Plan was linked to the SDP TRR. 543 It has been GEC Marconi's contention that it was open to the parties to define TRR differently for different purposes. The SDP's TRR was for the purpose of software development. Schedule 8's TRR was designed to impose a payment obligation. Assuming GEC Marconi was obliged to implement the SDP (which is denied), both TRR's could operate quite independently of each other. 544 I have in effect rejected this conclusion already by making the link I have between the Schedule 8 "review" and the SDP formal external review for TRR. I should nonetheless indicate why I consider GEC Marconi was in any event obliged to implement the provisions of the SDP in relation to TRR. 545 The combined effect of cl 55 and Schedule 3 of the Sub-Contract was to oblige GEC Marconi to comply with the standards set out in the SDP (and any subsidiary documents to the SDP) in supplying services to the Customer. The SDP defined the software development process, that process being self-described as "Best Commercial Practice". An integral element of that process and "Practice" was the conduct of formal external reviews of which TRR was one. In my view, the requirement of formal external review was a "standard" mandated by the SDP to be applied in the development process. The manner of conduct of those reviews (ie "in accordance with IPD Standard for Reviews and Audits": SDP cl 3.8) in turn required compliance with detailed procedures the object of which was to enable the customer formally to "evaluate products created during a development phase". Those procedures, when considered in light of the purpose they served, properly can be described as standards for the conduct of a review, and were no less so for being concerned with process and procedure. The IPD Standard document was for the purposes of Schedule 3 of the Sub-Contract a subsidiary document of the SDP. In consequence GEC Marconi was obliged to comply with its standards. 546 Finally, and additionally, cl 10 of the Sub-Contract required the parties to perform their obligations in accordance with the Project Plan in Schedule 7. One of GEC Marconi's contract obligations was to "assume project management and control …" in accordance with the Sub-Contract: cl 4(j). A project management function prescribed for GEC Marconi by Schedule 7 was to ensure that "the provisions described in the Software Development Plan are implemented". While cl 4 of the Sub-Contract did not directly oblige GEC Marconi to implement the SDP, the indirect route adopted of obliging GEC Marconi to perform its obligations in accordance with the Schedules, provided a prescription against which the adequacy and propriety of its performance was to be judged. The Sub-Contract, in other words, clearly contemplated that GEC Marconi would implement the SDP. I would add that the reference made to the "formal review" in cl 1.2 of Schedule 8 reflects that contemplation. 547 My conclusions then on the construction issues can be put as follows. Payment became due for Milestone 4000 when GEC Marconi satisfied the requirement for TRR that was prescribed in cl 3.8 of the SDP. The "review" of documents envisaged by Schedule 8 was the TRR itself. The "approval" of documents envisaged by the Schedule required assent to those documents by the Customer, though those documents had as well to pass TRR.
(2) The Factual Issues 548 There are two discrete issues here. The first is whether in fact the review of the test documentation was completed. The second is whether, if that review was completed, were the requirements that needed to be satisfied for TRR in fact satisfied. This second issue is premised upon the SDP stipulation that the TRR was to be held at the end of integration testing so that requirements for that testing and reports from it were part of the TRR requirements. Both of these matters can be dealt with together. 549 Preconditions required to be satisfied for the Milestone 4000 payment to be due were at least that the ATD be approved and that the SDSDD and the TASDD be reviewed. BHP-IT and the Commonwealth both submit that (i) the ATD was not approved; (ii) the SDSDD review was "Passed with follow-up action to occur"; and (iii) the review of the TASDD was never completed. As I understand the position taken by BHP-IT, it accepts that for Milestone 4000 purposes the review of the SDSDD was passed, the follow-up action being taken on the day after the review was passed "with follow-up action" and the Review Action Sheets were signed off by the Review Chairman as required by the IPD Standard document. 550 There is a considerable controversy between the parties as to whether or not the ATD was approved. It is common ground that the ATD review was split into three reviews and that these were held on 26 February 1996, on 11 March 1996 and on 9 and 12 April 1996. Each such review generated Review Action Sheets with action items running into many hundreds. No overall Review Result Record was signed for the ATD. The controversy between the parties relates to the reason why that did not happen. 551 As to the TASDD, it was the subject of a number of review meetings from 21 September 1995 to 6 June 1996 which generated significant comments and action items. The minutes of the Formal External Review of 6 June, while recording five action items, does not record that a review result was determined. While there was a Review Action Sheet created, there was no Review Result Record. BHP-IT and the Commonwealth submit that no result having been arrived at, the review was incomplete while GEC Marconi has submitted that no result was necessary in the circumstances and that the TASDD had been reviewed.
(i) The ATD 552 The Sub-Contract provided for TRR to take place on 6 September 1995. Such did not occur. In mid-November 1995 Mr Harris prepared a schedule for the delivery of the ATD. This led Mr Wishart to write to Mr Brent on 22 November 1995 proposing that the TRR for ATD occur on 15 January. That letter, as did some others in correspondence concerning the ATD, indicated that the TRR would be conducted in accordance with the sections on formal external reviews in the IPD Standard document. 553 A working draft of the ATD was forwarded to BHP-IT on 4 January. The version to be reviewed was forwarded to BHP-IT on 5 February, the TRR then being scheduled for 19, 20 and 21 February. 554 On 8 February 1996 Les Cook wrote to BHP-IT proposing that the ATD review be split into three reviews. That proposal was reiterated in a further letter of 12 February 1996 which, because of submissions made on it, is set out at length below. Between these two letters, Mr Brent put GEC Marconi's separate proposals to Mr Cook that Milestone 4000 be split into three reviews with separate payments being made for each. That separate proposal was rejected in the 12 February letter which was forwarded by Mr Brent to GEC Marconi on 13 February. 555 Omitting formal parts the 12 February letter stated: "In response to your letter of 9 February, the department is unable to agree to any split of Milestone 4000 until the impact of CRs 3057 (Stubs replacement) and 3048 (Xerox interface) is known. In the meantime, we are prepared to participate in the review of the ATD, SDSDD and TASDD documents as per the schedule shown below. We believe a progressive review of the ATD is necessary over a period of time given the size of the document. 26 February DFAT will jointly review and approve (subject to any agreed follow up changes being made no later than 1 month prior to the commencement of FQT) the ATD chapters on Functional Test Packets 1 to 10 for the Secret Canberra operational scenario only. DFAT will also jointly review the TASDD and SDSDD. 1 April DFAT will jointly review and approve (subject to any agreed follow up changes being made no later than 1 month prior to the commencement of FQT) the ATD chapters on Interface, Performance, Recoverability, COTS Software Regression, Developed Software Regression, Security and Support Subsystems for the Secret Canberra operational scenario only. 2 May DFAT will jointly review and approve (subject to agreed changes being made no later than 1 month prior to the commencement of FQT) the remaining operational scenarios in the ATD." 556 Three separate review meetings were agreed and these took place 26 February, 11 March and 9 and 12 April 1996. The Review Action Sheets of the first review contained two hundred and twenty-six action items; those of the second, one hundred and twenty-four items; and the Review Action Sheets of the third review, one hundred and forty-four items. 557 On 22 April 1996 Mr Goldsmith wrote to Mr Brent concerning the third review. His letter stated: "Attached are the Review Action Sheets recorded at the Formal External Review for the ATD Part 3. Please have this document circulated and allow the following to review and confirm the accuracy of the comments by initialling at the bottom of each page. The reviewers are invited to record any inaccuracy beside, underneath or over the applicable comment. Les Cook Bob Nichols David McGregor Please have this document returned to IPD Systems Engineering by COB Friday 26 April 1996 to enable rework to begin." 558 On 24 April 1996 Les Cook wrote to Mr Brent concerning the Review Action Sheets of the third review. That letter stated in part: "The IPD Review Action Sheets from the ATD review meeting held on 9 April 1996 are accepted subject to the following changes: ATD Review Part 3 of 3 … Items No 43, 45, 50 etc The wording of the action sheet represents what was said in the review. The action is to consider a large scale rework of the recoverability tests rather than to define a specific set of changes which can be agreed to at this stage. Because of the possible magnitude of the changes necessary to meet the intent of the comments provided, DFAT reserves agreement until the redrafting is completed and has been examined: emphasis added … ATD Review Part 3 of 3 - Security Item #6 The action item states that the issue will be 'checked'. DFAT reserves comment until the outcome of this checking is known. Item #18 Action is to supply the test when design is finalised. DFAT reserves comment until the outcome of this is known. Item #26 The action item states that the issue will be 'checked'. DFAT reserves comment until the outcome of this checking is known. … Item #48 The action item states that the issue will be 'investigated'. DFAT reserves comment until the outcome of this checking is known. Item #56 The action item states that the issue will be 'investigated'. DFAT reserves comment until the outcome of this checking is known. Item #68 The action item states a question. DFAT reserves comment until the answer to this question is known. Not Present See DFAT comments #62, #63, #65, #84 and #86 which seem to be absent from the action sheets." For reasons given below I infer that Mr Brent forwarded these comments to GEC Marconi on 29 April 1996. 559 On 12 August 1996 Mr Goldsmith wrote to Mr Brent, his letter opening with the following: "Issues Raised at the ATD Review (Phase 3) on 9 April 1996 Reference: A. BHP IT Letter KB-1184 dated 29 April 1996 At Reference A, Mr Les Cook (DFAT Project Director) raised a number of issues regarding the review comments made during the third review of the Acceptance Test Description (ATD) Document. Below are the issues which Les raised (in italics) followed by EASAMS responses. Would you please pass them on to Les and the Department." The letter then proceeded to respond to three matters. 560 By separate letter of 12 August 1996 to Mr Brent, Mr Goldsmith indicated that the review action sheets had been updated as requested by the Department, and he asked Mr Brent to "ensure that the Department reviews and approves the amendments so that EASAMS can then update the ATD document as requested". 561 The Department's response was conveyed to Mr Brent in a letter of 26 August. It stated: "The consolidated IPD Review Action Sheets from the ATD reviews have incorporated most of the amendments requested by DFAT. Security items 6, 18, 26, 48, 56 and 68 are, however, still to be addressed and the outcomes reviewed (see attached copy of DFAT review comments). Further, DFAT comments on Security items 62, 63, 65, 84 and 86 have not been included in the action sheets. The ATD review has not yet been signed off as complete. The Department is not prepared to approve the document as complete, nor as complete subject to agreed reworking. The significance of the degree of reworking required by several of the comments made at the review require the document to be reviewed again when the reworking has been performed." 562 Mr Brent in turn wrote to GEC Marconi on 28 August forwarding DFAT's letter and requesting that its comments be incorporated in the document and that the necessary arrangements be made "for the final review of the document". 563 Unlike with the SDSDD and the TASDD reviews, no minutes of any of the three ATD reviews are in evidence. There is, though, what purports to be an unsigned Review Result Record which records no result for the ATD review, but to which was attached the following typed note: "Notes: The review was held in 3 parts. At the completion of the part 3 (12 April 1996) the Customer "unofficially" informed IPD that the ATD would be passed with rework. Due to contractual issues at the time the Customer declined to sign-off on the review until the contractual issues had been resolved. N. Brazil." Mr Brazil, though working with, and representing, GEC Marconi at the time, was a BHP-IT employee. Next to his typed name are initials. The typed Result Record lists one of Mr Brazil's roles in the review as "Review Recorder". He was not called by BHP-IT to give evidence. 564 Les Cook was cross-examined at length both about this note and about his 26 August letter. Because of the reliance placed upon parts of that cross-examination by GEC Marconi, it is necessary to set out some number of extracts of that cross-examination by Mr Simpkins SC. 565 Reference having been made to Mr Brazil's note, the following exchange occurred: "Q. At the review meeting held on 12 April 1996, do you remember who it was that represented DFAT, or do you need to go back to the review sheet? A. No. It was primarily myself. Q. Did you tell Mr Brazil at the completion of the review meeting held on 12 April 1996 that the acceptance test description document would be passed with rework? A. I certainly did not. Q. Did you tell Mr Brazil that due to contractual issues at the time, you, however, were not prepared to sign-off on the review? A. No, I don't believe that's true at all. Q. Well, at the conclusion of the review held on 12 April 1996, did you speak to Mr Brazil? A. I don't recall that. Q. Did Mr Brazil ask you what the outcome of the review was? A. I'm afraid I don't recall. Q. Did he produce a review result record and ask you to sign it for the acceptance test descriptions document? A. I don't recall doing so." 566 A later sequence of questions again addressed the Brazil note: "Q. Can I suggest this you, Mr Cook: If the ATD had been passed with rework it would have been entirely consistent, wouldn't it, with the practice which was followed between the parties in relation to the milestone 2000 and milestone 3000 documents? A. Depending on the state of completion of document, yes. Q. As I understand what you wish to say, Mr Cook, you say, do you, that there were particular things about the acceptance test descriptions document which meant that it was much more incomplete than any earlier document you'd reviewed and that, therefore, the review couldn't be concluded on the basis of a pass with rework conclusion? A. Yes." 567 He was then taken to his 26 August 1996 letter to BHP-IT: "Q. Do you see in the first paragraph of this letter you say in relation to the IPD review action sheets from the ATD reviews that there are some identified security items which are still to be addressed and the outcomes reviewed, and that there are some comments that DFAT's made on some other identified security options that have not been included in the action sheets? A. Yes. Q. I just want to understand the sense of this letter. Does the letter mean the ATD has not been approved because of those identified security matters, or do you suggest that they are irrelevant to the question of completeness of the document presented for review at the ATD review? Perhaps I can withdraw that and put it more directly. I'm trying to understand, Mr Cook, what it is that you are referring to when, in the second paragraph in this letter, you are describing something as 'the significance of the degree of the reworking required'. What is that a reference to? A. At this distance and time, I'm not sure that I can remember what the significant items were. Q. These items were the items in 1996 that you say meant that contrary to an assumption that you had adopted perhaps in earlier correspondence the ATD could not be approved by DFAT, correct? A. Yes. Q. And, indeed, I think in your evidence to this Court you have suggested that there were, in fact, significant aspects of the ATD which prevented documents from being approved; correct? A. Yes. Q. And is His Honour to understand that you now can't tell him what significant aspects required reworking? A. I can't recall them in detail. If I went through the document and all the action sheets I could perhaps derive that information. Q. That's not an exercise that you've carried out for the purposes of giving any evidence in this case? A. No, I haven't. Q. Well, if these were matters of serious difficulty with the ATD in 1996, may I take it your ordinary practice would have been to maintain some reasonable record of what those matters were and what was being done by way of drawing attention to them so far as BHP-IT and/or GEC Marconi were concerned? A. I believe that record is in the review of the - in the documentation of the review. Q. Mr Cook, no doubt there are matters in the record of review which are identified as matters requiring attention. What I'm asking you about are those matters which you believed in 1996 to be of such significance that it meant that the ATD just could not be approved. Do you follow? A. I do." … Q. Mr Cook, I do want to be fair about it so I just need to understand whether the document that I've just taken you to, which is a letter you wrote to Mr Brent on 24 April 1996, sets out, as you presently recall it, what those matters of great significance were that you believed in 1996 precluded the acceptance test descriptions document from being approved by DFAT? A. I think it sets out the concerns I had relating to what was reviewed in the third review. I suspect there are similar documents relating to the other two reviews. And even in this one, for example, the bottom of page 14583, the second last items, number 43, 44 and 50, et cetera, define the need to consider a large scale reworking of some tests. That is not a minor matter. Some of these points are minor wording changes. Others relate to complete changes of large areas of testing. I believe if we look at the documents relating to the other two reviews there will be similar points made. Q. Well, can I go back to the question that I was wishing to ask a moment ago, again, and get an answer to it. I'm asking you whether it would be in accordance with your ordinary practices in 1996 in respect of such significant matters to maintain some appropriate record of what those matters were and what was being done to remedy them? A. No, I believe that the result - the review action sheets were sufficient to document what the problems were, or issues were. And at that time I believe I, and probably Mr Nichols and others, had in our minds what the problems were - the understanding of the problems." 568 Shortly afterwards and in response to question of my own Mr Cook conceded that he was now speculating as to what might then have been in his mind. Mr Cook was then invited to review the Action Sheets overnight to see if he could identify what matters were so significant as to require non-approval of the ATD. Though he returned next morning with a list of matters in the Action Sheets that were inadequately defined, he again conceded to me, that the list did not represent anything he recollected, but was a contemporary rationalisation. 569 There are only two aspects of Mr Harris' evidence relating to the ATD reviews to which I need refer. First, he accepted that on receipt of the review sheets, his team would change the acceptance test descriptions and that that process occurred from the end of April 1996 onwards. He equally agreed that by mid-August GEC Marconi was still trying to finalise the review comments about the ATD. Secondly, he agreed that he was aware that the position of both DFAT and BHP-IT in August 1996 was that the ATD documents had not been approved.
(ii) The TASDD 570 As an early precursor to TRR, on 18 September 1995 GEC Marconi forwarded a "working draft" of the TASDD to BHP-IT for information and comment. BHP-IT provided comments in letters of 21 and 25 September 1995. The TASDD went through a number of versions subsequently and on 19 February Mr McGregor sent comments to GEC Marconi on what was then TASDD Version 1.0 Draft C1, in anticipation of the formal external reviews of (inter alia) this document. Those comments identified nine major defects. In the accompanying letter Mr McGregor said of this document and the SDSDD: "The major problem with [them] as they currently stand is that they do not contain sufficient detail for either the contractor … or the Commonwealth … to install, configure and build the systems." 571 On 28 February 1996, Mr Brent forwarded to GEC Marconi DFAT's comments on the above draft. These identified five major and two minor defects. Item 7, which was described as a major defect, was in the following terms: "The system should be configured to use sealers and a gateway. This will be by either: (a) using Stubs emulation software if agreement is not reached on CR3057 (Stubs replacement); or (b) using the Stubs replacement (KIV-7) as per CR3057. Something should be shown in the TASDD to reflect the above." 572 A formal external review meeting for the TASDD was held on 1 March 1996. The Review Action Sheets are in evidence and disclose thirty action items resulting from the meeting. 573 According to Mr Harris further meetings were held between 1 March and 6 June. The minutes of the 6 June meeting to deal with now what was Version 1.0 Draft C2 of the TASDD indicated that: "This review incorporated comments made at an informal discussion held on the 4th of June 1996, the letter titled TASDD Review (File: 90/015051, 24 May 1996) from L G Cook and the comments concerning the content of the document raised by David McGregor (KB-1259)." The letter and comments referred to are not in evidence. 574 Under the heading "Broad Issues", the minutes recorded: "BHP-IT raised the following broad issues: · Sections 4.1, 4.3, and 4.6 require modifications. Figure 4-1 also requires modifications. DFAT raised the following broad issues: · TAS should be using the same software as the operational system. Therefore, the STUBS system (CR3049) should be included in the TAS. · It was agreed that in principle the TAS should use as much of the existing equipment in the TIF as is possible, rather than requiring the purchase of new equipment. · The diagram 4-1 is an extract from the ADD, and is out of date. The ADD should be re-reviewed to reflect reality, rather than have the TASDD using the ADD as its source. In DFAT's view, the PSI is responsible for maintaining documentation. There was some discussion on the process required to update the documentation." The Review Action Sheet recorded nineteen action items. 575 In the "Relevant Sub-Contract Provisions" section of the "Construction Issues" above, I quoted from cl 7.6.2 of IPD Standard for Inspections Reviews and Audits. It envisaged that at the end of the review meeting the reviewers determine the review result and that this is to be recorded in the Review Result Record. The minutes of the formal review for the SDSDD record such a determination being made for that document. The meeting for the SDSDD occurred on 6 June 1996 and ran from 9.42am to 9.53am. It was immediately followed by the TASDD meeting which finished at 11.27am on the same day. The same persons were attendees at both meetings. The minutes of the TASDD meeting do not record any determination being made as to the result of the review. 576 Mr Harris accepted in cross-examination that he did not remember ever seeing a final version of the document that had been reviewed on 6 June. Les Cook in cross-examination, having been shown the minutes of the TASDD 6 June meeting recalled the TASDD was reviewed and in light of the minute that it must have been reviewed again on 6 June. To the question: "Will you agree that certainly by no later than 6 June 1996 the TASDD had been reviewed?" he responded: "There had been a review, yes".
(i) The ATD 577 As I earlier indicated the positions taken by the parties in relation to the ATD external review were, on the part of BHP-IT and the Commonwealth, that the ATD was never approved (conditionally or otherwise) as work was still being done, and, on GEC Marconi's part, either that the review was completed and the ATD approved for practical purposes or that the improper action of the Commonwealth prevented such from occurring. 578 The Brazil note on the Result Record Sheet is at the core of GEC Marconi's submission: the ATD would have been "passed with rework" but for the "contractual issues". Given the evidence before me, though, there is a very real question whether the point had in fact been reached where approval would have been given in any event. I make that observation for this reason. 579 On 12 February 1996 Les Cook wrote to Mr Brent describing what the Commonwealth's participation in the three ATD review meetings would be. In relation to that he said it would jointly "review and approve (subject to any agreed follow up changes being made no later than 1 month prior to the commencement of FQT)" that part being reviewed in each review. What this conveyed is of some importance. While anticipating that approval would be given on each occasion, it contained an important implicit qualification. That was that the "agreed follow-up action" would be identified and agreed prior to the approval being given. Unless and until it was agreed, the ATD would not be approved. And when it was agreed the approval would be an approval subject to agreed follow up action etc, or, to put it briefly, approval "subject to rework". 580 It should be said that this letter obviously was prospective and anticipatory in character and proceeded on the assumption that the ATD document would be able to be approved subject to agreed follow-up action. Save for any question of an estoppel subsequently arising in consequence of it: see below; it did not preclude a change of mind. It remained open to the Commonwealth to act otherwise than as foreshadowed in relation to approving the ATD document. 581 After the third ATD review, on 9 and 12 April, Mr Goldsmith by letter of 22 April sought both BHP-IT's and the Commonwealth's review and confirmation of the accuracy of the comments on the Review Action Sheets. Les Cook provided his to Mr Brent on 24 April 1996. That letter indicated in relation to some number of items that "DFAT reserves comment"; in relation to one group of items, "DFAT reserves agreement until the redrafting is completed and has been examined"; and it commented on a number of security items being absent from the action sheet. 582 It is clear from both of Mr Goldsmith's letters of 12 August 1996 that Mr Brent wrote to him on 29 April 1996 to provide comments from Les Cook on the third ATD review. One of those two letters addressed directly three comments so received, describing those comments in the actual language used in Les Cook's 24 April letter. Mr Brent's 29 April letter is not in evidence and no oral evidence was given on this sequence of correspondence. It is equally clear from the other of Mr Goldsmith's 12 August 1996 letters that Mr Goldsmith was aware from April 1996 that Les Cook was requiring amendments to the Action Sheets and that those sheets had not been agreed in their entirety. The burden of this letter was to get DFAT's approval to the amendments made so that GEC Marconi could update the ATD (ie take "agreed follow up action"). 583 While it may not strictly be necessary in light of the above to make the following findings I do so because of criticisms made of DFAT's actions and, in particular, that it delayed until 26 August before communicating its reasons for refusing to pass the ATD. I infer as the most probable deduction that may reasonably be drawn from the correspondence (i) that BHP-IT received the Cook 24 April letter prior to 29 April 1996; and (ii) that BHP-IT forwarded that letter to GEC Marconi on 29 April 1996, rather than sending merely extracts from it relating to the three specific comments mentioned in Mr Goldsmith's 12 August 1996 letter. 584 Les Cook's comments on 24 April may be said to depart from what was expressly foreshadowed in the 12 February letter in that it indicated that agreement was reserved on some items until redrafting was complete and had been examined. It nonetheless made plain, as it did in relation to the security items, that DFAT was not agreeing, or agreeing conditionally, to the action items. 585 As at 12 August it was known that the action sheets still had not been approved by Les Cook. That approval was then being sought. It was denied in Les Cook's letter of 26 August 1996. A review was required after reworking had been performed. 586 Les Cook's evidence was subjected to the criticism that he was unable over five years later to indicate what were the matters that required such reworking as precluded the ATP being passed with follow-up action. I accept he had no memory of them when he gave evidence, but I am prepared to infer that such matters did exist at the time. The comment made on "Items No 43, 45, 50 etc" in his letter of 24 April 1996 clearly enough conveyed that DFAT was then reserving agreement until a redraft had been completed and examined "[b]ecause of the possible magnitude of the changes necessary to meet the intent of the comments provided". 587 As the Commonwealth had indicated in its submissions, GEC Marconi did not lead evidence to establish that the substance of the rework that was required was of such a trivial nature that, from a qualitative viewpoint, the ATD document should have been passed. 588 I do not consider that the objections raised by Les Cook to the Review Action Sheets were contrived or manufactured for a collateral purpose; I have no basis in the evidence for holding that from a technical point of view the reservations he made and the agreement he withheld were unreasonable. Mr Goldsmith did not give evidence in this proceeding so I am unable to consider what his understanding was of the outcome of the ATD reviews from at least the time he wrote his 22 April letter. What his correspondence then and thereafter indicated is that he was working to secure agreement to the Review Action Sheets so that the ATD document could be updated. Those actions were consistent with an appreciation that the review was still not completed for the reasons conveyed in Les Cook's correspondence. 589 Mr Brazil's note apart, the contemporary documentation would satisfy me (i) that the ATD review was not completed by agreement either at the end of the third review on 12 April 1996 or thereafter for reasons related to the ATD document itself and to action that needed to be taken in relation to it, and (ii) that the actions both of GEC Marconi and of the Commonwealth from 22 April until the "re-review letter" of 26 August 1996 were consistent with these reasons having that operative effect. The question is whether that note gives a quite different complexion to what occurred on and after the 12 April review. 590 Quite understandably, GEC Marconi has invited me to accept that the note was not a fictitious record. If it did not record a conclusion reasonably open having regard to the communications in which Mr Brazil had engaged there was a ready solution - BHP-T could have (and should have) called Mr Brazil to explain the note. For DFAT to have acted in the way suggested in the note was wrongful and cannot be relied upon by it or by BHP-IT. 591 I would have to say that I have been troubled by this unexplained document and by the course taken by BHP-IT in relation to it. While he both worked with the GEC Marconi at the time and represented it at the ATD reviews, Mr Brazil was a BHP-IT employee. Not only did BHP-IT not call him to give evidence, it was content simply to rely upon the Commonwealth's submissions on the status of, and weight to be given to, the Brazil note. 592 Having said this, I am satisfied that, the Brazil note notwithstanding, I should not depart from the conclusion I foreshadowed in light of the correspondence. My reasons for not attributing significant weight to the note in the circumstances are as follows. First, the note itself raises questions. It recorded that the Commonwealth unofficially informed GEC Marconi that the ATD would be passed with rework but the Commonwealth nonetheless declined to sign off until the contractual issues were resolved: (I will for convenience use the term "communication" to encompass both matters.) How GEC Marconi was informed (separately from, or as part of the meeting) was not indicated. Who, as representing GEC Marconi, was so informed was likewise not indicated. Though the Result Record Sheet names four GEC Marconi representatives as participating in the review of the ATD (Ms Schmidt, Mr Brazil, Mr Harris and Mr Carter), the evidence would suggest that only Ms Schmidt and Mr Brazil were present at the third review. Mr Harris' evidence is that he was present at the first two of the three reviews. Ms Schmidt, who appears to have been the "Chairperson" of the third review, was a GEC Marconi employee and in early 1996 took over as IPD integration acceptance test manager. There is nothing in the note to suggest that the communication was to Mr Brazil alone. Distinctly, the Result Sheet suggests that the intended signatories were to be the persons who took part in any one or more of the three ATD reviews even if they were not at the third review. As I will note below, Mr Harris was such a person. There is no evidence that he (or for that matter any other of the listed signatories) was ever aware of, or asked to sign, the Result Sheet. There is no evidence to suggest the note reflected the agreed view or understanding of the listed reviewers. On the contrary, in relation to Mr Cook and Mr Harris. 593 Secondly, what makes the communication to GEC Marconi unusual is that, if it was made at the meeting, there is no evidence to suggest that it was communicated beyond the meeting (particularly by the Chairperson) to persons in GEC Marconi who, one would expect, would have had a real interest in knowing of the communication either for reasons related to the document, or to the contractual dispute. I refer to Mr Harris, Mr Goldsmith and Roger Cooke. I would note in passing that GEC Marconi served its first notice of breach on BHP-IT nine days before the 12 April meeting, and BHP-IT forwarded its notice to DFAT the day prior to the meeting. Of the people to whom I have referred perhaps the most significant was Mr Harris as he participated in two of the three reviews; he was a person listed to sign off on the review of the ATD; and he was the person responsible for the ATD document. There is no evidence of the Commonwealth's communication being passed on to him. Rather, the evidence was that in August 1996 he understood the Commonwealth's position to be that it had not approved the ATD. 594 Thirdly, I will not traverse again the correspondence between the parties subsequent to 12 April other than to note the following. Not only was the correspondence bereft of any indication that would reflect the Commonwealth's unofficial communication, it also revealed the reason why the ATD review was not considered to be complete by the Commonwealth. The parties' actions in that period were consistent with their working towards completion of the ATD review. 595 Fourthly, Les Cook in cross-examination categorically denied making the unofficial communication. The other Commonwealth person listed as a participant in the ATD review on the Result Record Sheet was Mr Nichols (though the evidence does not suggest he was at the third review). Mr Cook's recollection of the detail of what transpired and of his own thoughts at the third review meeting is generally quite unreliable. Nonetheless, having regard both to the particular subject matter and to the context in question, I accept his disavowal of having made such an unofficial communication at the 12 April meeting notwithstanding he did not recall speaking with Mr Brazil at the conclusion of the review meeting. It is quite possible that something was said at the meeting about contractual issues given that the meeting was held the day after BHP-IT forwarded GEC Marconi's notice of breach to the Commonwealth and that one item in the notice related to non-payment of an invoice for Milestone 4000 (of which the TRR of the ATD was part). My preparedness to accept Mr Cook's disavowal is reinforced by what I consider to be the unlikelihood of such a communication being made in the circumstances. I later indicate (Part IV: BHP-IT's Second Cross-claim: Matters of weight and credit) that Les Cook on occasion could properly be said to be both partisan and manipulative. I do not consider that these qualities infected his denial of the unofficial communication and of the reason given for the failure to sign. Having regard to the significance of the communication and of the conduct attributed to the Commonwealth in the Brazil note and in light of the general evidence concerning Les Cook's project management and relationship with the Department, I consider it unlikely that he would have taken such an open and unequivocal step that would have had immediate contractual significance both for BHP-IT and GEC Marconi without the authority of at least Mr Skinner. There is no evidence of any such authorisation. 596 Finally, if the communication had been made in the terms indicated in the note it is surprising that GEC Marconi did not take steps, if only by way of seeking reassurance, to ensure that the two other reviews then underway, the SDSDD review (which was "Passed with follow-up action") and the TASDD review, would result in judgments being made on the merits. 597 There is no basis for my inferring that the Brazil note is a fabrication. Nonetheless, when considered in light of all of the evidence and in particular in light of (a) the general conduct of each of GEC Marconi, the Commonwealth and BHP-IT subsequent to the 12 April meeting; and (b) the absence of any reflection of the note in that conduct, I consider that it would be unsafe to attribute any significance or weight to it. The note itself is contradicted by what otherwise are established facts. When considered with the Result Sheet, the composite document raises ambiguities, doubts and speculations. 598 I am satisfied then that the third ATD review was not completed, conditionally or otherwise, at the conclusion of the 12 April meeting or thereafter.
(ii) The TASDD 599 The positions taken by the parties in relation to the review of the TASDD were as I earlier indicated: BHP-IT and the Commonwealth contend the review was never completed; GEC Marconi submits to the contrary, it being said in light of the minutes that no further work was to be done beyond implementation of what had been agreed and there was no suggestion that any further process of review was required. 600 Given (a) the long history of this document, (b) the exchanges and meetings that took place in relation to it, (c) that broad issues were raised by both BHP-IT and DFAT, (d) the absence of any recorded determination of a result (in contrast with the SDSDD meeting that preceded the TASDD meeting) and (e) the lack of evidence of a final version of the TASDD, I do not consider that the most probable deduction that may reasonably be drawn is that the review was completed for practical purposes. The absence of a recorded result in the minutes or in a Review Result Record is telling and made the more so as both the SDSDD and TASDD minutes suggest that the procedures followed for the reviews reflected those of the IPD Standard for Inspections, Reviews and Audits. 601 Les Cook's evidence that there had been a review by 6 June does not assist GEC Marconi. In the context in which his answers were given he can only reasonably be taken as affirming the facts that reviews of the TASDD took place on 1 March and 6 June. His answers did not address the result of the 6 June meeting let alone suggest that the formal external review process was completed. 602 I am not satisfied that a result had been reached in relation to the TASDD or that the review process had been completed for practical purposes. I agree with the submission of BHP-IT and the Commonwealth.
(c) GEC Marconi's Reply: Estoppel 603 I can deal with this matter shortly. GEC Marconi by reply, asserts that BHP-IT is not permitted to advance as a fact that the TRR documents were not "approved" or "reviewed" as the Sub-Contract on its face required. There was, it is alleged, an assumed state of affairs between the parties relating to external reviews upon which it relied detrimentally and from which BHP-IT and the Commonwealth are not permitted to resile. That state of affairs was that for the purposes of reviews in general, but of TRR in particular, the Commonwealth's role was to be limited to making comments which GEC Marconi was free to ignore, but which, if agreed with, should result in changes being made to the ATD no later than one month prior to the commencement of Acceptance Testing and that by such process, the Commonwealth would be taken to have approved the ATD. 604 This assumed state of affairs was claimed to be the product of correspondence passing between the parties both in 1995 and in 1996. I need to refer to several of the letters in some detail. 605 The first letter was written on 14 February 1995 after Milestone 2000 (the Preliminary Design Review or "PDR") in response to a letter forwarded by Mr Brent. It related to the manner in which DFAT had been commenting on agreed changes and making further comments on the documents. The letter stated in part: "Following discussions with Mr Harris concerning the effort involved, DFAT will not insist on receiving versions of the documents with all of the agreed changes, provided that the agreed changes are incorporated by CDR. Your letter raises questions concerning the purpose of the reviews. There is an implication that the review is to be regarded as a major contractual event in its own right. In fact, other than as proof that a certain amount of work has been done in order to justify a progress payment (which is refundable should final acceptance of the Canberra system not be achieved), the PDR and CDR have no contractual significance. The sole exception to this is the Acceptance Test Plan which is to be agreed as a final document. DFAT regards its role in the design process as advisory, intended to provide advance warning to the PSI should there be an indication that the system may not meet the functional requirements when tested or that the standard of documentation will not meet the requirements identified in the DIDs. This advice should be offered whenever potential problems are perceived. In particular, I am concerned by the statements that 'If their (DFAT's) comments are not returned in time then we must reserve the right to disregard them. Also major issues identified after the formal review meeting (particularly at CDR) must be regarded as CRs, not as part of the review process'. Firstly, the PSI is under no obligation to act on any of the comments. If comments are ignored, the PSI risks failing to achieve requirements in acceptance testing or other project completion criteria." This letter was passed on by BHP-IT to GEC Marconi on 21 February 1995. 606 Almost a year later, the Commonwealth wrote two letters concerning TRR to BHP-IT which resulted in the definitive version of the triple ATD reviews. That version was contained in the 12 February 1996 letter the terms of which are set out in full in "Additional Factual Material: (i) ATD" above. Here I merely repeat the first relevant part of that letter which reads: "26 February DFAT will jointly review and approve (subject to any agreed follow up changes being made no later than 1 month prior to the commencement of FQT) the ATD chapters on Functional Test Packets 1 to 10 for the Secret Canberra operational scenario only. DFAT will also jointly review the TASDD and SDSDD." Emphasis added. 607 I would note of this that the qualification ("subject to agreed changes" etc) may well relate only to the concept of "approval", given that no such qualification is attached to the term "review" in the last sentence quoted above. 608 Both of Les Cook's February 1996 letters were forwarded to GEC Marconi. I infer that GEC Marconi acquiesced in the proposals put by Les Cook in the 12 February letter. 609 I have already indicated what I consider to be the burden of the 12 February letter as it related to the ATD review. Contrary to GEC Marconi's submission on the agreed state of affairs, that letter (i) required the agreed follow up action to be part of what was approved; (ii) it did not preclude a change of mind on the Commonwealth's part (subject to any question of estoppel); and (iii) being prospective in character, the letter presupposed that the ATD document was one capable of being approved with agreed follow-up action if necessary. 610 The 1995 letter could, in my view, only properly be taken as being concerned with the PDR and the Critical Design Review ("the CDR") and with the design process. These two reviews were quite different in function and purpose from the TRR. I do no consider that this letter had any bearing at all on the understanding any of the parties brought to the nature of the Commonwealth's participation in the TRR process - the more so given (i) that some number of GEC Marconi letters to BHP-IT (eg 22 November 1995 from Mr Wishart and 5 February 1996 from Mr Harris and, importantly given its date, 20 February 1996 from Mr Goldsmith) indicated that the various TRR reviews would be conducted in accordance with the IPD Standard for Inspections, Reviews and Audits; and (ii) that the evidence is quite consistent with their having been so conducted. 611 I am not satisfied at all there was the conventional understanding propounded by GEC Marconi. I likewise am not satisfied on the evidence that it was in fact relied upon in the actual review process itself. It is quite clear that the conduct of the Commonwealth and, to a degree, BHP-IT in both the long sequence of correspondence and meetings for the TASDD, and in the ongoing exchanges over and comments on, the ATD from the first review on 26 February 1996 until Les Cook's letter of 26 August 1996 would have made any such action in reliance quite unreasonable. Neither the Commonwealth nor BHP-IT were assuming the role of bare commentators. Moreover, even on GEC Marconi's own assumption the time for making "comments" was not spent. I have found the TASDD review was not completed. It was likewise with the ATD. Les Cook's 24 April letter is strongly indicative of this. 612 Distinctly, there is no evidence at the time in relation to either of the above reviews that GEC Marconi objected to the supposed change of stance by the Commonwealth. This tends to confirm my view that the Commonwealth was not actually perceived by GEC Marconi as having unexpectedly or otherwise moved from a position to which it had previously committed itself. 613 I agree with the submissions both of the Commonwealth and BHP-IT that the GEC Marconi's submission is based on a contrived use of the 1995 and 1996 correspondence. I reject the estoppel claim.
(3) Outcome 614 In light of my findings in relation both to the ATD and to the TASDD, the documents in question had not been "approved" or "reviewed" respectively at the TRR. Consequently in both instances the conditions required to be satisfied for the Milestone 4000 payment to become due, were not established. There was no breach of contract occasioned by BHP-IT's refusal to make payment on the Milestone 4000 invoice rendered by GEC Marconi. Accordingly the Notices of Breach lacked foundation.
MILESTONE 4000: ADDITIONAL DEFENCES 615 There are four additional matters raised by BHP-IT by way of defence to its alleged Milestone 4000 breach of contract. 616 The first is a consequence of what is said to be the proper construction of the Sub-Contract. This defence is that for TRR to be achieved not only must the relevant documents have been reviewed or approved, GEC Marconi also had to demonstrate to BHP-IT that the Developed Software was ready for acceptance testing. That need, reflecting the purpose of TRR, was a consequence of the provision in the SDP which provided: "The TRR shall be held at the end of the Integration Testing phase, and shall be used to ensure that the system is ready for Acceptance Test." I will refer to this as "the SDP Defence". 617 The second defence is that the invoice for Milestone 4000 was not correctly rendered. The essence of this defence is that when the invoice was submitted to BHP-IT on 12 March 1996 the review approval processes were not complete and GEC Marconi was still working on the relevant documents. In consequence payment for the Milestone was not due; the invoice was not "correctly rendered" as required by cl 16.5 of the Sub-Contract; and no fresh invoice was ever submitted to BHP-IT: ("the Invoice Defence"). 618 The third defence is that even if the non-payment of the invoice constituted a breach, the breach was not one entitling GEC Marconi to terminate for "failure … to perform [the] Contract" under cl 40.8: ("the cl 40.8 Defence"). There is a related defence that the non-payment was not a breach at all as Mr Brent was not satisfied on reasonable grounds under cl 16.1 of the Contract that the documentation met the requirements of the contract: ("the cl 16 Reasonable Grounds Defence"). 619 The fourth defence is that, if there was a breach, GEC Marconi continued to proceed with the Sub-Contract and thus elected to affirm it: ("the Affirmation Defence"). 620 I do not intend to consider all of these defences in detail. It is necessary for me to express concluded views on aspects of two of them. Otherwise I will confine myself to brief comments. My reason for taking this course is that I consider there to be an overwhelming case of bad faith on GEC Marconi's part in relation both to its claim that payment for Milestone 4000 was due and to its attempt to use non-payment of that Milestone as a basis for termination for breach.
(1) The SDP Defence 621 I would make simply this comment. The SDP indicated when and why TRR was to occur. In the event, the parties began the formal external reviews of the relevant documents long before integration testing was ever likely to occur. By so doing they acted inconsistently - and it must be presumed knowingly: cf Sargent v ASL Developments Ltd, above, at 645 - with the SDP. If they were content to proceed to approve or review the relevant documents, why should it not be said that the TRR was then completed, albeit at a time different from that prescribed in the contractual documentation?
(2) The Invoice Defence 622 In light of my findings, it is the case that when GEC Marconi submitted its invoice to BHP-IT on 12 March 1996, payment for Milestone 4000 was not due. The invoice at that time was not "a correctly rendered" invoice: Sub-Contract, cl 16.5(a), and cl 16.3. There was in consequence no trigger to the Delegate's obligation to make a progress payment pursuant to cl 16.1. No fresh invoice was ever rendered, although GEC Marconi now submits in this proceeding that all matters required to occur for Milestone 4000 to be achieved occurred no later than 6 June 1996. In all three of its Notices of Breach, GEC Marconi claimed that BHP-IT failed to pay the Milestone payment "pursuant to Invoice 14248 of 12 March 1996". 623 It is GEC Marconi's submission that if the TRR conditions were in fact later satisfied (ie payment for Milestone 4000 was due) that of itself would render effective the previously ineffective invoice. It is said that it would be commercial nonsense to construe cl 16 so as to require GEC Marconi to go through the "hollow formality" of submitting a fresh invoice. 624 I cannot accept this submission. The Sub-Contract went to some lengths in cl 16 to establish a regime for the making of payments based on correctly rendered invoices. For present purposes a correctly rendered invoice was one in which the amount claimed for payment was due for payment: cl 16.5(a). Unless and until such an invoice was submitted the Delegate's obligation under cl 16.1 was not enlivened. Neither did the 21 "Normal Working Day" period begin to run within which payment was to be made. On GEC Marconi's submission, on the day that fortuitously TRR was completed, the ineffective invoice was rendered effective; the 21 day period began to run; and the Delegate's obligation was triggered - notwithstanding (i) that no one might actually have been aware, or at least realised at the time, that TRR was completed; and/or (ii) that the Delegate might have been and might have remained, unaware that his obligation under cl 16.1 had been triggered and that the 21 day period had began to run. 625 If, as GEC Marconi further submits, a failure to make the TRR payment would entitle it to resort to cl 40.8 for termination purposes, it is readily understandable why the cl 16 payment procedure was agreed to be the parties. On GEC Marconi's submission, it would be possible for a contractor in the position of BHP-IT to be in breach of contract without ever being aware that its obligation to make payment had arisen or without ever being asked to pay after payment became due. 626 The submission is manifestly inconsistent with the actual requirements of cl 16. It also is contradicted by cl 40.8. A Notice of Breach had to specify the particular breach required to be remedied: cl 40.8. All these notices did this by reference to the non-payment of the 12 March invoice. It was that breach and no other that BHP-IT was required to remedy: cf Italmare Shipping Co v Ocean Tanker Co Inc [1982] 1 WLR 158 at 164. And it required BHP-IT to do something it was never, and could never be, obliged to do. 627 I agree entirely with the submissions of BHP-IT and the Commonwealth. The requirement that a fresh invoice be submitted once payment became due was no hollow formality. There were clear prudential reasons for it. Accordingly, having found that the 12 March invoice was incorrectly rendered at the time, I conclude that it was and remained ineffective to trigger BHP-IT's obligation to make payment under cl 16 of the Sub-Contract (assuming TRR was later completed), and that there was no breach of contract in relation to TRR that could activate the termination provisions of the Sub-Contract. 628 I need not explore the question whether GEC Marconi ever directed its mind at the time to the question of the date when TRR was completed. If it did and was satisfied that it was by a particular date, it was on its own head that it did not then render an invoice for payment.
(3) The cl 40.8 Defence/The cl 16.1 Reasonable Grounds Defence 629 I refrain from comment on either of these defences.
(4) The Affirmation Defence 630 I have earlier found that, prior to the service of the first Notice of Breach, GEC Marconi had in any event elected to affirm the Sub-Contract notwithstanding the breach occasioned by the non-provision of STUBS. BHP-IT has raised a like election to affirm defence on the dual assumptions that the non-payment of the 12 March invoice was a breach of contract and that it was one that attracted the cl 40.8 and cl 40.9 termination provisions. 631 The first Notice of Breach was served on BHP-IT on 3 April 1996. That Notice gave BHP-IT thirty-two days to remedy the breach. No payment on the invoice thereafter being made, the cl 40.9 conditions were satisfied by early May for GEC Marconi to terminate the contract. It did not do so then, or shortly thereafter. Two further Notices of Breach were served - the one on 18 June 1996, the other on 24 September 1996. Both relied upon the non-payment of the 12 March invoice. Termination was not effected until 10 December 1996. 632 Before referring to the evidence and arguments relating to affirmation, it is necessary to consider the legal significance of the second and third notices of breach. They were in my view incapable of altering the legal character of the breach resulting from the non-payment of the 12 March invoice. That breach, I consider, was a once-and-for-all breach when it occurred: cf Larking v Great Western (Nepean) Gravel Ltd, above; albeit (on the assumption that is being made) it was of such a character as permitted resort to the cl 40 termination provisions. I should add that I do not consider that the breach in its setting was repudiatory in the sense of evincing an intention no longer to be bound by the terms of the contract: see Byrnes v Jokona Pty Ltd, above, at [70]-[80]. As Mr Brent's 21 March 1996 letter setting out his reasons for not authorising payment of the invoice illustrates: see above "Construction Issues, Additional Factual Material"; he was endeavouring to adhere to the contract and to have it performed. The actual significance of the second and third notices was, at best, evidentiary. If an election to affirm had not been made prior to the service of each of them, the respective notices may have constituted evidence of continuing "reservations" communicated to BHP-IT: cf Champtaloup v Thomas, above, at 269. 633 The conduct subsequent to the first Notice of Breach that is relied upon by BHP-IT as being justifiable only if an election had been made to affirm is the following. (i) In the period 3 April 1996 to 10 December 1996, GEC Marconi continued to perform software development and testing work and it continued to seek guidance and clarification from DFAT concerning requirements of the FRS through User Guidance Requests it raised. (ii) Between April and August 1996 it continued to participate in the review of documents required for the TRR milestone. The evidence of this has been outlined previously. 634 It is GEC Marconi's submission that, at no time after 6 June 1996 (the date it submitted TRR was completed) and prior to 10 December 1996, did GEC Marconi ever resile from its contention that BHP-IT was in breach in failing to make payment. Nor did GEC Marconi ever expressly elect to affirm. The issuing of the two subsequent Notices of Breach is quite inconsistent with such an election having been made. 635 For my own part, I do not consider that acts of performance done by GEC Marconi during the thirty-two day period specified in the notice for remedying the breach could, as of course, be regarded as evidencing an election to affirm in that period. A clear and expressly communicated election would ordinarily need to be shown for an affirmation to be made out during that time. But if the circumstances were such that there was no reasonable likelihood of the breach being remedied, account properly could be taken (a) of that thirty-two day period in determining when after it a reasonable time to make an election had passed; and (b) of the significance of acts of performance done in that period in considering whether they led to a later election. 636 In the present case, the evidence does not suggest that BHP-IT gave any indication that it was likely at all to resile from the position it stated in Mr Brent's 21 March 1996 letter. BHP-IT confirmed as much in a letter to GEC Marconi of 3 May 1996. And on 5 May it wrote to GEC Marconi requiring it to comply with and complete its obligations under the Sub-Contract. I am prepared to infer that GEC Marconi had no reasonable expectation of BHP-IT to the contrary. In these circumstances, account properly can be taken of the passage of time from 3 April 1996 and of the acts done since then in determining whether the point had been reached by early June 1996 where GEC Marconi's conduct became unequivocal and was justifiable only on the basis of an election to affirm. 637 The period from 3 April onwards was one in which claims of breach or, alternatively requests to perform, passed between the parties. That state of affairs did not abate prior to termination of the Sub-Contract. In that climate of dispute in the period to early June 1996 BHP-IT could not have reasonably expected that GEC Marconi was no longer continuing to hold it in breach on account of the non-payment of Milestone 4000. Nonetheless GEC Marconi's continuing conduct in relation, in particular, to the TRR reviews from April 1996 until the 6 June TASDD review meeting was such as to evince an intention to keep the contract on foot at some time between late April and the beginning of June. Absent a notice of termination shortly after the expiry of the thirty-two day remedying period, that conduct was only justifiable if such an election had been made. In saying this I appreciate that there were other matters besides the non-payment of Milestone 4000 which GEC Marconi was continuing (mistakenly) to assert constituted breaches. But it was not open to GEC Marconi to act inconsistently by joining in the continuing performance of the contract while purporting to "keep warm" its power to terminate. The continuation of the TRR review after 3 April brought about the need to make an election. And that election was made by conduct that was not "consistent with the reservation of a right to terminate": Immer (No 145) Pty Ltd, above, at 30. 638 I would make this additional comment. Having activated the cl 40.8 termination provisions, GEC Marconi was required after the expiry of the thirty-two day period of grace to indicate with reasonable promptness what was the election it intended to make. Though it is unnecessary for me to express a concluded view on the matter, I consider that such a requirement is implicit in a clause structured in the fashion of cl 40.8 and cl 40.9. What GEC Marconi could not do was leave BHP-IT caught in a state of uncertainty. It could not speculate at BHP-IT's risk. Clauses such as cl 40.8 simply are not designed to hold the party in breach in continuing suspense, not knowing whether their further performance will, or will not, be rendered fruitless in the event. GEC Marconi purported to do this for a period of eight months from 3 April 1996. 639 On the dual assumptions I have been making for the purposes of this submission, an election to affirm was made prior to the service of the second Notice of Breach. The non-payment of Milestone 4000 no longer furnished a breach that could attract the termination provisions of the Sub-Contract.
GENERAL DEFENCE 640 BHP-IT has pleaded that in serving the three Notices of Breach, GEC Marconi breached its implied duty of good faith and fair dealing. It has not, though, relied on that breach to attack the efficacy of the termination itself. Rather that breach is advanced in BHP-IT's cross-claim against GEC Marconi as evidence of repudiatory conduct, a matter considered later in these reasons: see Part III: The Repudiation Claim. 641 A distinct general defence, nonetheless, has been raised to challenge the termination. It is based on the proposition that, in order to exercise an election to terminate for breach, the electing party must be able to establish that it was capable of performing, and willing to perform, the contract at the time. GEC Marconi, it is said, was not so capable and willing. For its part, GEC Marconi disputes the applicability to its express power to terminate of the proposition relied upon. 642 Given the conclusions I have already arrived at as to why GEC Marconi's claim must fail, I consider it unnecessary to do more than note that this was yet another defence raised to that claim.
PECUNIARY RELIEF/DAMAGES 643 In light of the number and range of grounds upon which GEC Marconi's principal claim must fail, I do not intend to engage in the process of assessing the pecuniary relief/damages to which it would have been entitled had it been successful. That would add appreciably to what already are lengthy reasons for judgment. 644 However, there are two particular matters to which I consider it is appropriate to refer. One relates to the nature of the claim for relief prosecuted by GEC Marconi. The other involves the proper construction of a provision of the Sub-Contract (cl 38) that imposed a "damages cap" on the designated liabilities of the parties.
(1) The Nature of the Claim Made 645 The Sub-Contract, as will be seen later in these reasons, was manifestly a losing contract: see Part III: The Repudiation Claim. For this reason GEC Marconi sought to frame its case, as best it could, in restitution and not for contractual relief by way of damages. It put its claims in the alternative. 646 The first basis was that, the contract having been terminated, it could recover in a quantum meruit claim the reasonable cost to it of performing the work it had performed under the Sub-Contract, the contract price not providing a ceiling to the amount recoverable. This way of putting the claim was based upon the decisions in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 and Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd [1995] 2 Qd R 350. 647 The alternate basis of the claim is that, as GEC Marconi had achieved Milestones 1000, 2000, 3000 and 4000, it was entitled to be paid for them. Additionally, it could recover in quantum meruit for work performed after it achieved Milestone 4000 until the Sub-Contract was terminated. 648 Distinct from the above alternatives, a contractual claim for damages was made to recover lost commercial benefits, the relevant benefits being those that would otherwise have accrued from performance of the Sub-Contract itself. This claim is said to have been based on Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64. 649 BHP-IT has disputed all of the claims made. It denies that a quantum meruit claim is available because, in the circumstances, BHP-IT did not accept or receive any benefit from the work performed so that there was no unjust enrichment. And unjust enrichment underpins this claim in Australian law: Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221. As to the milestone payments, it contends that payment has already been made for Milestones 1000, 2000 and 3000. That BHP-IT drew upon the unconditional guarantees given to cover those payments - a matter considered later in these reasons: see "The Call on the Financial Securities", below; does not alter this. It simply means that if the calls were wrongly made that money had to be returned. Finally the damages claim for lost commercial benefits is attacked on both legal and factual grounds. 650 The aspect of these various claims and defences upon which I consider it appropriate to comment, relates to the quantum meruit alone and to the milestones plus quantum meruit claims. The comments that I make are subject to this reservation. I have not been addressed on the first of the two matters to which I will refer, although GEC Marconi has properly adverted to it in response to issues I raised in oral submissions. For this reason my conclusions must be considered tentative ones. The two matters are (i) to what extent, if at all, was quantum meruit an available remedy on termination of this Sub-Contract at the time it was terminated; and (ii) assuming it was an available remedy, what were the limits of the relief it could provide in the circumstances?
(i) Was quantum meruit an available remedy? 651 It is trite law that when a contract is terminated under a termination clause or at common law, both parties are discharged from the further performance of the contract but that rights are not divested or discharged which have already been unconditionally acquired unless the contract provides to the contrary: McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457 at 476-477; Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (1936) 54 CLR 361 at 379-380; Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129; Carter and Harland, Contract Law in Australia, [2225] (4th ed). So, for example, a right to be paid a liquidated sum under a contract which has accrued unconditionally before termination is recoverable after termination: eg Westralian Farmers Ltd, above. 652 In the present case the contract price was defined to be: "the total amount payable by the Customer to the Contractor under this Contract for CSE supplied by the Contractor up to the [Actual Acceptance Date] of the Developed Software and specified in Schedule 4 and includes any price variations as a result of amendments to this Contract." 653 Schedule 4 described the seven milestones, their respective "deliverables" and the differing sums payable in respect of each. Clause 3 of the Sub-Contract made those prices firm for the delivery period set out in Schedule 8. That Schedule prescribed the different dates upon which the relevant deliverable was to be "Submitted to Customer", though the actual acceptance date for the deliverables for Milestones 2000, 3000 and 4000 was stated to be the date of achievement of Milestone 5000. Clause 16 of the Sub-Contract, as has been seen, provided the machinery for payments that were due on achievement of a milestone. 654 For the purposes of highlighting the issue to which I wish to draw attention, I will assume that (i) the rights to receive the payments for Milestones 1000 to 3000 were unconditional in the circumstances; and (ii) the right to payment for Milestone 4000 had been acquired unconditionally in that on completion of TRR it had become due: see Hyundai Heavy Industries Co Ltd v Papadopoulos, above: cf Carter, Breach of Contract, [1239]ff (2nd ed). In making this assumption I emphasise that, for present purposes, the party that has failed to perform is not GEC Marconi, but is BHP-IT and that the obligation to perform Milestone 5000 has been discharged on termination. I equally have not overlooked that, in an alternative submission, GEC Marconi has contended that the Sub-Contract was an "entire contract": on which see Phillips v Ellinson Brothers Pty Ltd, above, 233ff per Starke J; Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 350; Carter and Harland, Contract Law in Australia, [1822]ff (4th ed); Chitty on Contracts, vol 1, para 22-027ff (28th ed); Butterworths, The Law of Contract, s7.45 (1999); and note the "advances clause" (cl 10) in Hyundai Heavy Industries Co Ltd, above, at 1131. The question whether the contract was an "entire" one is dealt with later in these reasons: see Part II: The Call on Financial Securities. I would also note that BHP-IT has submitted, without enlarging on it, that the Sub-Contract provided for GEC Marconi's entitlement to payment for work done and that this remained on foot after termination which only discharged future performance. 655 Turning now to restitutionary claims, it is equally well accepted law, to use the language of Mason P in Trimis v Mina [1999] NSWCA 140 at [54] which I respectfully adopt, that: "The starting point is a fundamental one in relation to restitutionary claims, especially claims for work done or goods supplied. No action can be brought for restitution while an inconsistent contractual promise subsists between the parties in relation to the subject matter of the claim. This is not a remnant of the now discarded implied contract theory of restitution. The proposition is not based on the inability to imply a contract, but on the fact that the benefit provided by the plaintiff to the defendant was rendered in the performance of a valid legal duty. Restitution respects the sanctity of the transaction, and the subsisting contractual regime chosen by the parties as the framework for settling disputes. This ensures that the law does not countenance two conflicting sets of legal obligations subsisting concurrently. As Deane J explained in the context of the quantum meruit claim in Pavey & Matthews (at 256), if there is a valid and enforceable agreement governing the claimant's right to payment, there is "neither occasion or legal justification for the law to superimpose or impute an obligation or promise to pay a reasonable remuneration". See also Update Construction at 275n; Ansett Transport Industries (Operations) Pty Ltd v Alenia Aeritalia & Selenia Spa (1991) 105 FLR 169; Brenner v First Artists Management Pty Ltd [1993] 2 VR 221. This principle is applicable to other restitutionary claims (see, eg Foran v Wight (1989) 168 CLR 385 at 413, 432; Baltic Shipping Co v Dillon (The Mikhail Lermontov) (1993) 176 CLR 344 at 355-6, 385)." 656 The issue this raises is whether, if the rights to be paid for the four milestones had accrued, was there either "occasion [or] legal justification": Pavey & Matthews Pty Ltd v Paul, at 256; for a quantum meruit claim for the services to which those accrued rights to be paid related? On the various assumptions I have been making, the answer would appear to be "no". Payment for Milestones 1000 to 3000 had already been made pursuant to the Sub-Contract and the right to be paid for Milestone 4000 had accrued unconditionally before termination. Payment for that Milestone would be a contractual matter: cf Bank of Boston Connecticut v European Grain and Shipping Ltd [1989] 1 AC 1056 at 1098-1099; and not a matter of quantum meruit: Chitty on Contracts, vol 2, para 37-160 (28th ed); Farnsworth, Contracts, 858 and 571ff. This conclusion, which seems to me to be a principled and appropriate one and one which GEC Marconi seems to have had in mind in its alternate quantum meruit claim, has the following consequences. 657 First, it gives greater significance to the different consequences of termination and rescission respectively for the purposes of quantum meruit claims than has been assumed to be the case in light of Renard Constructions (ME) Pty Ltd v Minister for Public Works, above and Iezzi Constructions Pty Ltd v Watkins Pacific (Qld) Pty Ltd, above. Secondly, insofar as it is premised upon the proposition that the right had accrued in consequence of the necessary performance having been rendered to acquire that right, it is consistent with the majority view in the United States to the extent that restitutionary claims are not permitted to a party who "has fully … performed and all that remains due for him is a liquidated sum of money": Dobbs, Law of Remedies, vol 1, 650 (2nd ed); Farnsworth, Contracts, 858 (3rd ed); Palmer, Law of Restitution, s4.3; Restatement of Contracts, Second, s373(2). It may well be inconsistent with the majority view in the United States if that view would limit the above restriction on restitutionary claims to cases of full performance of a contract: see eg Boomer v Muir 24 P 2d 570 (1933); but cf to the contrary Restatement of Contracts, Second, s373 Comment (d) and s240; Farnsworth, Contracts, 858 and 571ff. The United States view in any event has owed much to the proposition that termination for repudiation or material breach effected a rescission ab initio: see Renard Constructions (ME) Pty Ltd, at 277; but see more generally Palmer, above, s4.6. 658 A quite distinct question may arise in the present case in relation to Milestone 4000. If it was the case that TRR was achieved by GEC Marconi but, by agreement or waiver, at a time earlier than that envisaged by the contract: see the SDP Defence, above; there would remain the question whether the performance for which the payment was made included that work which the SDP presupposed would be done prior to TRR but which had not been done by GEC Marconi. (The SDP did not envisage TRR being held until the end of Integration Testing.) In such a case, would GEC Marconi's right to receive Milestone 4000 preclude a quantum meruit claim for work done after the right in fact accrued but which was work which was to be done prior to the time contractually scheduled for TRR? Would such a claim allow GEC Marconi "to recover more than once for the same loss"?: see Baltic Shipping Co v Dillon (1993), above, at 355. 659 I have considered it necessary to raise the above questions as it may be the case that, in the circumstances, GEC Marconi had no entitlement to bring a restitutionary claim at all.
(ii) The Limits of Quantum Meruit 660 "The conventional view is that it is unjust enrichment which gives rise to the obligations of restitution": Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335 at 354; see also Commissioner of State Revenue (Victoria) v Royal Insurance Australia Ltd (1994) 182 CLR 51 at 75. On the assumption that quantum meruit was a remedy available to GEC Marconi, BHP-IT has taken its stand on this view. It asserts that, as a factual matter, it derived no actual benefit from the work performed; it was not in consequence unjustly enriched; hence there should be no restitutionary relief. 661 The weight of authority would not permit me to accede to this submission in such a bald form: see the cases collected in Mason and Carter, Restitution Law in Australia, [1166]ff. A party in breach may be deemed to have received a benefit where it has received part of the agreed or requested return: see Brenner v First Artists' Management Pty Ltd [1993] 2VR 221 at 256ff. In any event, the performance received in respect of the first three milestones enabled BHP-IT in turn to receive its milestone payments under the Head Contract. 662 Perhaps the more significant point to the attack relates to how the value of the services performed are to be assessed. The Sub-Contract was a losing one and this is of present significance. It has long been recognised that in such cases a quantum meruit claim can result in a recovery that far exceeds what the innocent party would have derived had the contract been performed. Importantly, the stipulated contract price provides no ceiling to what can be recovered: Slowey v Lodder (1901) 20 NZLR 321; affd Lodder v Slowey [1904] AC 442; Palmer, Law of Restitution, s4.4. It equally has long been recognised that "it is difficult to see why breach, which saves the plaintiff further loss, should be grounds for recovery of a greater sum [than the contract price]": Dobbs, Law of Remedies, vol 3, s12.7(5) (2nd ed). Criticism of this outcome, particularly in this country, has not abated: see Carter and Harland, Contract Law in Australia, [2339] (4th ed); Carter, "Discharged Contracts: Claims for Restitution" (1997) 11 JCL 130. As is said in Mason and Carter, Restitution Law in Australia, at [1430]: "There is … little to be said in principle or policy for a rule which provides a clear incentive to manufacture or snatch at repudiation as a means of escaping a bad bargain". 663 All that I wish to note here is that BHP-IT has in its submissions challenged directly the decisions in Renard and, inferentially, Slowey v Lodder (1901) 20 NZLR 321; affd Lodder v Slowey [1904] AC 442, for their disregard of the contract price. 664 Distinctly, BHP-IT has challenged the basis upon which GEC Marconi invites me to assess the fair value of the work it performed. That basis, derived from Renard at 276-277, was "the reasonable cost [to the contractor] of the work he had done and the money he has expended". That proposition, I would note, is but one of the ways in which the courts have formulated how "fair value" or "fair remuneration" is to be assessed: for a helpful summary see Brenner's case, above, at 262-264; see also Mason and Carter, above, [1415]ff. 665 On the facts of the present case, BHP-IT submit in effect that the Renard principle would compensate GEC Marconi for its loss (of which, it is said, it was in large degree the author) but without regard to the value of its work in terms of its quality and utility to BHP - IT and the Commonwealth. In this manner the submission obliquely challenges the modern rationale of the quantum meruit claim. If it is founded on unjust enrichment which must be disgorged, then that enrichment cannot be assessed simply by reference to the reasonable cost to GEC Marconi of the work it performed when much of that work done was, it is said, inefficient and ineffective. 666 I have referred to the challenges made by BHP-IT to the current orthodoxy in quantum meruit claims for this reason. On one possible view of the facts of this case (I express no comment on this), those challenges would expose sharply the obvious lack of coherence between the modern rationale of quantum meruit (ie unjust enrichment) and the principles presently employed in giving effect to it.
(2) The cl 38 "Damages" Cap 667 The value GEC Marconi placed upon its work performed for quantum meruit purposes was $9,124,012.00. As will be seen, it has other claims as well against BHP-IT one of which (for $3,875,000.00) relates to BHP-IT's wrongful call upon bank guarantees supplied by GEC Marconi as security under the Sub-Contract. 668 Clause 38 of the Sub-Contract, insofar as presently relevant provided: "38.1 The liability of a Party for breach of this Contract, or in tort, or for any other common law or statutory cause of action arising out of the operation of this Contract, shall be determined under the relevant law in Australia that is recognised, and would be applied, by the High Court of Australia. … 38.3 The aggregate liability of a Party under this Contract, in respect of actions described in subclause 38.1 shall except in relation to liability: (a) for personal injury (including sickness or death) which shall be limited to $40,000,000; (b) for loss of, or damage to, tangible property which shall be limited to $40,000,000; (c) under an indemnity provided by a Party under clause 28 of this Contract which shall be limited to $10,000,000; or (d) under an indemnity provided by a Party under clause 36 of this Contract which shall be limited to $40,000,000; be limited to an amount equal to $8,600,000." 669 GEC Marconi contends that this provision does not apply either to its quantum meruit claim or to its claim in respect of the bank guarantees. As different reasons are given for these results they need to be treated separately.
(i) The quantum meruit claim 670 GEC Marconi submits that the critical words in cl 38 are the words "under this Contract" in cl 38.3. And it is contended that they qualify the words "aggregate liability" so that the opening words of cl 38.3 could be recast as "The aggregate liability under this Contract of a party, in respect of actions described in Sub-Clause 38.1 shall …". So read, for a liability to be caught by the "cap", it must be a liability "under" the contract, ie it must be a liability "created by, in accordance with, pursuant to or under the authority of" the Sub-Contract: cf Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 249. If the words "under this Contract" were treated as qualifying the immediately preceding word "Party", those words, it is said, would be superfluous and the word "under" inapt in that one does not naturally speak of a party under a contract as opposed to a party toa contract. A quantum meruit claim is not a liability under contract: Pavey & Matthews Pty Ltd v Paul, above. It is an autonomous liability. 671 BHP-IT submissions, with which I agree, are that cl 38.1 identifies the liabilities to which cl 38.3 is intended to apply: ie "breach of this Contract, … or for any … cause of action arising out of the operation of this Contract". Taken as a whole the expression in cl 38.3 - "The aggregate liability of a Party under this Contract in respect of actions described in subclause 38.1" - refers to the limitation of liability imposed by the sub-clause. That expression does not impose a requirement that the "cause of action must be under this Contract". If it did it would rob the words "in respect of actions described in subclause 38.1" of their intended meaning. 672 Agreeing as I do with the BHP-IT submission, I need add little. The reference in cl 38.3 to actions described in sub-clause 38.1 encompasses actions for breach of contract and causes of action in tort, at common law or under a statute, that arise out of the operation of the Contract. It is that nexus with the Contract that makes such actions the subject of contractual regulation. But it would be anomalous in my view for all such actions to be regulated by cl 38.1 for its purposes, while only a small sub-class of them were to be regulated by cl 38.3. If "under" has the meaning in this setting that is ascribed to it by GEC Marconi, it is difficult to see how a common law action, let alone a statutory one, could be said to give rise to a liability "under this Contract". The use of the word "under" in cl 38.3 may have been infelicitous. But the intent of the sub-clause in its setting is clear enough. It was to apply the limitation of liability to all of the actions referred to in cl 38.1. The relevant liability had to "arise out of the operation of this Contract". It did not have to arise "under" it. If one was to ascribe a separate meaning to the words "under this Contract" (rather than treating them as part of a composite expression which conveys its own meaning), that meaning would probably best be equated with "for the purposes of this Contract".
(ii) The calls on the bank guarantees 673 Clause 17(2) of the Sub-Contract required GEC Marconi to provide security from an approved guarantor in the form of an unconditional financial undertaking ("the Financial Security"). It was to be substantially in the form prescribed in Schedule 13 and to be provided in accordance with Table 8.3 of Schedule 8. Three such guarantees were given in respect of Milestones 1000, 2000 and 3000. 674 Clause 41 of the Sub-Contract indicated the circumstances in which BHP-IT could have resort to the Financial Security consequent upon a breach of contract by GEC Marconi. 675 GEC Marconi accepts that no issue arises in relation to the cap if BHP-IT's conduct in calling on the Financial Securities was lawful. If it was not it would, for cl 38(3) purposes, have constituted at least a breach of contract (ie of cl 41). Any other possible cause of action arising from the call down would likewise be one "arising out of the operation of [the] Contract": cl 38.1. And so any positive claim against BHP-IT for such a wrong to recover the $3,875,000 would on its face be caught by the cl 38.3 cap. 676 GEC Marconi seeks to avoid this consequence by submitting that, in the circumstances, BHP-IT was precluded from raising the cl 38.3 cap in respect of any claims made by GEC Marconi concerning the Financial Securities. The practical effect of BHP-IT's action in calling on the guarantees would be to reduce the limit for GEC Marconi's claims from $8,600,000 to $4,725,000. It is of this effect that GEC Marconi complains. 677 The bases of this preclusion seem to be, first, that to allow BHP-IT to rely upon the cap would be to allow it to profit from its own wrong; and, secondly, it would be unconscionable to raise the cap, BHP-IT having no reasonable basis for resorting to the guarantees. I would note that there is no pleaded or positively asserted claim of estoppel as such. 678 The first of these - profiting from one's own wrong - is clearly unsustainable. It amounts to no more than an assertion that a wrongdoer is better off who can attract the benefit of a cap, than is a wrongdoer who cannot. 679 The second basis depends first and foremost on a factual finding of unconscionable conduct, whatever the juridical basis for such a finding may happen to be in this setting. I deal with the substantive claim made by BHP-IT later in these reasons: see "The Call on the Financial Securities", below. I merely note here that I do not find BHP-IT to have engaged in unconscionable conduct. Hence the asserted preclusion, whatever its basis, lacks foundation. 680 I would note finally, that GEC Marconi has not pleaded or asserted that, in calling on the Financial Securities, BHP-IT breached its implied duty of good faith and fair dealing; that the call was ineffective; and that the money received by BHP-IT was recoverable as money had and received to GEC Marconi's use.
THE SUBSIDIARY CLAIMS 681 Four additional and discrete claims have been made by GEC Marconi. These are claims for loss suffered because: (i) BHP-IT wrongfully called upon the bank guarantees for $3.875M provided by GEC Marconi as security under the Sub-Contract; (ii) BHP-IT wrongfully converted the STUBS emulator after the Sub-Contract was terminated; (iii) BHP-IT repudiated the Standing Offer Agreement in respect of DPSI panel services; (iv) BHP-IT has failed or refused to pay GEC Marconi delay and prolongation costs required by the Sub-Contract.
The call on FINANCIAL SECURITIES 682 Clause 41 of the Sub-Contract provided, insofar as presently relevant, that: "Any damages, liquidated damages, losses, costs and expenses recoverable by the Customer from the Contractor in consequence of the Contractor's breach of this Contract may be deducted from the Financial Security." 683 GEC Marconi contends that if it was entitled to terminate the Sub-Contract on 10 December 1996 (contrary to my finding), it was not lawful for BHP-IT to make calls on the guarantees on 29 January 1996 and GEC Marconi could take proceedings for the recovery of those calls subject to the possible application in the circumstances of the cl 38(3) cap. Alternatively, if, as I have held, GEC Marconi's termination was ineffective, BHP-IT could call on the guarantees if the requirements of cl 41 were satisfied. GEC Marconi submits that they were not on either of two grounds. The first is that for damages, etc, to be recoverable under the clause, recoverability had first to be demonstrated either by a declaration to that effect or by an arbitral award: Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158. The second is that if it was sufficient merely to make a demand for a disputed amount, no bona fide claim could have been made for the full amount of the guarantees and BHP-IT has not attempted to demonstrate its demand was bona fide. 684 The first of the alternative submissions above is, in substance, a claim of breach of contract against BHP-IT. BHP-IT's response to it is that the sums recovered under the three guarantees were in the amounts paid to GEC Marconi for Milestones 1000-3000. The contract having lawfully been terminated by BHP-IT those sums were recoverable from GEC Marconi as they were paid to it subject to acceptance of the contract deliverables on achievement of Milestone 5000: Schedule 8, Table 8.1. 685 BHP-IT's response opens up what is a recurrent issue in this proceeding. I briefly referred to it in the context of GEC Marconi's quantum meruit claim. It reappears later in these reasons in one of the Commonwealth's defences to GEC Marconi's claims for delay and prolongation costs: see below "The Delay and Prolongation Claim (c) The Defences". That issue is in substance whether the achievement of Milestone 5000 was a condition of the payments made to GEC Marconi for Milestones 1000 to 3000. BHP-IT's submission here, as also the Commonwealth's in relation to the delay and prolongation claim, is that the Sub-Contract was one containing an "entire obligation": cf Baltic Shipping Co v Dillon (1993), above, at 350; which required the delivery of the Canberra System Developed Software at Milestone 5000 as a condition precedent to the payment of the earlier milestones becoming irrevocable, ie those milestones were only earned upon achievement of Milestone 5000. This somewhat arresting result is said to be ordained by the terms of the Sub-Contract. 686 Because this submission does raise a recurrent issue in this proceeding I will, as a matter of convenience, deal with it in this particular setting. However, as I will later indicate, I consider that there is a short answer in any event to GEC Marconi's claim. Before turning to the "entire obligation" submission it is necessary to refer at a little length to the terms of the Sub-Contract.
(a) The Contractual Setting 687 A significant number of provisions of the Sub-Contract bear on the question of construction raised by BHP-IT's submissions. Some have already been referred to at some length and will only be repeated here in précis form. 688 The Sub-Contract contained a definition of "Contract Price". It was: " "Contract Price", means the total amount payable by the Customer to the Contractor under this Contract for CSE supplied by the Contractor up to the [Actual Acceptance Date ("AAD")] of the Developed Software and specified in Schedule 4 and includes any price variations as a result of amendments to this Contract." Schedule 4 cl 7 specified the "Contract Price" for the CSE by reference to a table (Table 4.2) that replicated three of the six columns of Table 8.1 of Schedule 8 ("The Implementation Plan") that is set out (partially) below. The three columns of Table 4.2 were headed respectively "Deliverable Reference Ident", "Deliverable Description" and "Payment Amount (AUD)". The items referred to under these headings were respectively, the seven milestones (Milestone 1000 to 7000), the descriptions of the seven milestone deliverables and the price to be paid for each of those seven deliverables. 689 Clause 3 of the Sub-Contract made the prices set out in Schedule 4 firm for the delivery period set out in Schedule 8. Clause 1.1 of Schedule 8 was in the following terms: "1. DELIVERABLES SCHEDULE AND PAYMENT PLAN 1.1 Table 8.1 below sets out the planned Contract Acceptance Dates for the project deliverable's (as described in the Scope of Work contained in Schedule 9), and the payment plan." 690 Table 8.1 has been set out in full above: see "Non-Payment for Milestone 4000". It is necessary to refer again to its format, though only in part. It is sufficient that I refer only to the first two milestones: Deliverable Reference Ident Deliverable Description Customer's Responsibility Date Submitted to Customer Contract Acceptance Date Payment Amount (AUD) 1000 Project Mobilisation Nil Not Applicable Contract Signature 1 250 000 2000 Preliminary Design Review 08/11/94 Subject to acceptance on achievement of milestone 5000 1 250 000 Emphasis added.
Milestones 3000 ("Critical Design Review") and 4000 ("TRR") each had the same typed entry under the heading "Contract Acceptance Date" as that emphasised above. Those entries are crucial to BHP-IT's submission. 691 I would note in passing that the interpretation clause of the Sub-Contract stated that: "Contract Acceptance Date" in relation to the Developed Software means the date set out in the Project Plan and the Implementation Plan by which the Acceptance Tests for the Developed Software are to have been completed." 692 Clause 10.1 required BHP-IT and GEC Marconi to perform their obligations in accordance with (inter alia) the Schedule 8 Implementation Plan. 693 When dealing with "Non-Payment of Milestone 4000" I set out the relevant provisions of cl 16 that dealt with the making of "progress payments in accordance with the milestone payment schedule". I have already indicated my view that the clear contemplation of cl 16, when read in light of Schedule 8, was that a contracted milestone became due when the requirements of that milestone had been met. The additional comment I would make is that there is nothing on the face of cl 16 to indicate that a payment made in accordance with its procedures might nonetheless be conditional or refundable: cf Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129 at 1131. 694 There are three additional contractual matters to which I should refer. The first relates to liquidated damages. By virtue of cl 39 and of Schedule 8, where Acceptance Tests were not successfully completed for Milestone 5000, liquidated damages were payable at the rate of $2000 per day. No liquidated damages were payable for delay in relation to any of the earlier milestones. 695 Secondly, the Financial Security. Sub-clauses 17.2 and 17.5 provided: "17.2 The Contractor shall provide security in the form of an unconditional and irrevocable financial undertaking ("the Financial Security") from a guarantor approved by the Delegate. The Financial Security provided shall be in a form acceptable to the Delegate and substantially in the form appearing in Schedule 13 and shall be provided in accordance with Table 8.3 of Schedule 8. … 17.5 Upon the issue of the Certificate of Acceptance for the Canberra system the Delegate shall release the Financial Security within 7 days by notifying the Contractor that the Financial Security is no longer required." 696 Schedule 3 of the Sub-Contract carried forward the provisions of cl 17. It was in the following terms: "Unconditional Financial Undertaking (subclause 17.1) The Contractor is required to provide Unconditional Financial Undertakings in respect of progress payments made. The amounts and the timing of the undertakings shall be determined in accordance with Table 8.3 of Schedule 8." 697 Table 8.3 of Schedule 8 required four financial guarantees to be given. One was for each of the first four milestones and was to be given at the time the respective milestone was achieved and in the sum of that milestone's payment. 698 Clause 41 of the Sub-Contract stipulated: "Any damages, liquidated damages, losses, costs and expenses recoverable by the Customer from the Contractor in consequence of the Contractor's breach of this Contract may be deducted from the Financial Security or money then due to the Contractor under this Contract and if that Financial Security or money is insufficient for that purpose, the balance remaining unpaid shall be a debt due by the Contractor to the Customer and may be: (a) set off against any other money due to the Contractor by the Customer under this Contract; or (b) recovered from the Contractor by the Customer in any Court of competent jurisdiction." 699 The Financial Securities given by Banque Nationale de Paris in this case were in the form of the deed prescribed by Schedule 13. That form included the following clauses: "1. The Guarantor unconditionally undertakes and covenants to pay to the Customer on demand without reference to the Contractor and notwithstanding any notice given by the Contractor to the Guarantor not to pay same, any sum or sums which may from time to time be demanded in writing by the Customer to a maximum aggregate sum of $ 2. The Guarantor's liability under this Undertaking shall be a continuing liability and shall continue until payment is made under this Undertaking of the said maximum aggregate sum or the Customer notifies the Guarantor that this Undertaking is no longer required." 700 Thirdly, cl 18 of the Sub-Contract required that an approved third party provide a guarantee for the performance of GEC Marconi's obligations and the discharge of its liabilities under the contract. Such a performance guarantee was given by GEC Marconi Australia Pty Ltd. As will be seen, it is a subject of BHP-IT's first cross-claim.
(b) Applicable Principles: an Entire Contract/Entire Obligation 701 The drafting of modern contracts dealing with projects of any size and complexity has diminished the significance of the question whether a contract is an entire one. The principles that bear on that question are of quite some antiquity: see eg Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129 at 1131. For present purposes I would note the following. 702 (i) An entire contract, or an entire obligation, is one in which, or in relation to which, the consideration for the payment of money or the rendering of some other counter performance is entire, indivisible and not severable: Baltic Shipping Co v Dillon, above, at 350; Steele v Tardiani (1946) 72 CLR 386 at 401; Phillips v Ellinson Brothers Pty Ltd (1941) 65 CLR 221 at 233ff. 703 (ii) If a contract or an obligation is entire its complete performance is a condition precedent to payment or counter performance: Phillips v Ellinson Brothers Pty Ltd, above; Hoenig v Isaacs [1952] 2 All ER 176 at 181; see Cheshire and Fifoot, Law of Contract, para 26.13 (8th Aust ed). The court has no power to apportion the consideration which, in the case of money, is thus regarded as a "lump sum": see generally Chitty on Contracts, vol 1, para 22-030 (28th ed). 704 (iii) The question whether a contract or an obligation is entire or is, in contrast, divisible, is a question of construction: Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124; Hoenig v Isaacs, above. While building contracts (which have significant similarities with the present type of contract) have commonly been regarded, prima facie, as entire or "lump sum" contracts: see Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Chitty on Contracts, vol 2, para 37-139 (28th ed); and see Halsbury's Laws of Australia, vol 3(2) "Building and Construction", 65-1255; such contracts commonly provide to the contrary by, for example, apportioning the consideration: eg Walsh v Kinnear (1876) SCR(NSW) 434; but cf Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1229 where the contract provided both for the payment of instalments and for their refund if the contract was cancelled in specified circumstances. As was said in the first edition of Halsbury's Laws of England, vol 3, s458-459: "458. The large expenditure which builders and contractors have to incur in carrying out the works which they have undertaken to construct renders it usual for the contract to provide for payments on account of the price during the construction of the works. The manner in which these payments on account are regulated varies according to the terms of the contract. Sometimes the several instalments become due on the completion of particular stages of the work … ; sometimes the interim payments are to be not less than a fixed sum .. ; or, again, at fixed periods, irrespective of amount … . … 459. Whichever method is agreed upon as that in accordance with which payment is to be made, nothing becomes due to the contractor until he has done everything to entitle him to receive payment. Each certificate for an instalment creates a debt due, and the contractor is entitled to immediate payment thereof subject to the terms of the contract and any right of the employer to any set-off or counterclaim damages." 705 (iv) The usual rule in relation to instalment payments is as stated above: see also Brooking on Building Contracts, [4-16] (3rd ed); Keating on Building Contracts, 4-06, 4-17 (7th ed); Unidroit, Principles of International Commercial Contracts, Art 6.1.4, Comment 2; Farnsworth, Contracts, 564 (3rd ed). Once the right to payment has accrued it is enforceable as a debt: Pickering v Ilfracombe Railway Co (1868) LR 3CP 235; and that right is not lost notwithstanding that the contract is subsequently terminated because of the default of the party possessing the right to payment: McLachlan v Nourse [1928] SASR 230 at 233-234; see also Markham v Bernales (1906) 8 WAR 208 (a quantum meruit case). Again as was stated in the first edition of Halsbury (above, at s460): "Where, after the payment of money to the contractor on account, he fails to complete owing to his own default or abandons the contract without good cause, the employer may be entitled to recover back the instalments paid on the ground that the consideration has wholly failed; but at all events the employer would have a ground of action for a breach of the contract to complete, in which the damages recovered might equal or exceed the amount paid on account." 706 (v) If a contract or obligation is to be found to be entire notwithstanding that the contract or obligation provides for payment by instalments, the contract on its proper construction must indicate that the instalments are nonetheless conditional upon complete performance of the contract or obligation, ie that they are refundable if this does not occur because of the default of the party that is to render the performance: cf Hyundai Heavy Industries Co Ltd v Papadopoulous, above, at 1131. 707 The final comment I would make is that, while I have persisted in using the term "entire contract", as a matter of convenience, I recognise the criticisms that can be made of it: see Chitty on Contracts, vol 1, para 22-027 (28th ed); Corbin on Contracts, vol 3A, s694 ("Entire and Divisible are Terms of Confusion").
(c) The Obligation to Achieve Milestone 5000 708 The short question raised by BHP-IT's submission is whether all milestones up to Milestone 5000 had to be achieved before payments made in respect of any of those milestones became unconditional, ie were no longer refundable. The linchpins of the argument that there was an entire obligation to be performed by GEC Marconi are (i) the notation in Table 8.1 of Schedule 8 under the heading "Contract Acceptance Date" which said "Subject to acceptance on achievement of milestone (sic) 5000", in relation to Milestones 2000, 3000 and 4000; (ii) the statement in Schedule 3 that the securities are required to be provided "in respect of progress payments made"; and (iii) the release of the securities on acceptance of the Canberra System at Milestone 5000. 709 In common with GEC Marconi in its submissions on the like argument of the Commonwealth in relation to the delay and prolongation claim, I am satisfied that this reference in Table 8.1 was a reference to the acceptance date of the contract deliverables for Milestones 2000 to 4000. It did not relate to, or precondition in any way, the payments made in respect of those milestones. The structure of the Sub-Contract was such that the payments for Milestones 1000 to 4000 were apportioned to particular phases of the work to be performed. The "Contract Price" was the aggregate of those payments as apportioned in Schedule 4 (subject to price variations resulting from contract amendments). Table 8.1 for its part, had two distinct purposes. One was to prescribe planned "Contract Acceptance Dates for the project deliverable's (sic)". The other was to prescribe the "payment plan", Schedule 4 having indicated the amount of each of the seven milestone payments but not their respective times of payment. 710 I do not consider that the statement in Schedule 3 linking the financial securities to the progress payments made assists in illuminating the present question. It reflects a convenient device for augmenting the security given as the contract progressed and provided protection for cl 41 purposes to that extent. BHP-IT seeks to make a deal of what is said to be the commercial reason for that linkage, ie that the progress payments are recoverable if the Canberra system is not delivered at Milestone 5000. I am not satisfied that so significant a commercial reason can be found in the fact of that linkage. The Schedule 3 statement no less so than the language of Table 8.1 provides a most oblique way of achieving a most important effect for the contractors if its purpose was to evidence an intention to make the obligation an entire one. 711 There has been a desultory debate in this proceeding as to whether the milestone payments, though made on achievement of designated work, were in fact payments in advance. The Commonwealth contends that they were while BHP-IT and GEC Marconi contend to the contrary. Whether they were or were not prepayments is a question of construction that I need not answer, though I would suggest that the Schedule 3 statement lends some support for the prepayment contention. 712 The release of the securities after acceptance of the Developed Software on achievement of Milestone 5000 did no more than reflect that the principal burden of the contract has been performed successfully. The achievement of Milestone 5000 provided an appropriate time for the release of the securities and cl 17(5) said no more than that. 713 The devices employed in the Sub-Contract to protect BHP-IT against the contingencies of GEC Marconi's delay in, or failure to, achieve Milestone 5000 were threefold: first, there was the liquidated damages clause that was activated when the Milestone 5000 Acceptance Tests were not successfully completed by the relevant "Contract Acceptance Date" specified in Schedule 8; secondly, there were the financial securities that were required to be given in respect of Milestones 1000 to 4000 which could be called upon in the circumstances envisaged by cl 41 of the Sub-Contract, and which were to be released on acceptance of the Canberra System at Milestone 5000; and thirdly, there was the performance guarantee obtained from GEC Marconi Australia Pty Ltd under cl 18 of the Sub-Contract. 714 When one has regard (a) to the payment provisions of cl 16 of the Sub-Contract which, as I have found, presupposed that a milestone payment was due when the requirements of that milestone had been met; and (b) to the various devices used in the Sub-Contract to protect BHP-IT against GEC Marconi's possible delay or default in achieving Milestone 5000, I am satisfied that, in the absence of a clear and unambiguous provision to the contrary: cf Hyundai Heavy Industries Co Ltd v Papadopoulos, above; The Tergeste [1903] P 26 at 34; the right to be paid for achievement of a milestone prior to Milestone 5000 was an unconditional right and the payment so received was not refundable. The reason I consider a clear and unambiguous provision to the contrary would be necessary is because I consider the actual terms and tenor of the Sub-Contract were quite inconsistent with the obligation of entire performance proposed by BHP-IT and the Commonwealth. 715 I am satisfied that, while performance of each particular milestone up to Milestone 5000, was the condition precedent to the payment for that milestone (ie each milestone embodied an entire obligation), performance of all milestones including Milestone 5000 was not a condition precedent to being paid unconditionally for achievement of each of Milestones 1000 to 4000. And I would note in passing that, given the terms in which Table 8.1 refer to Milestone 1000, it is not easy to divine the basis upon which achievement of that milestone was supposedly made subject to achievement of Milestone 5000. 716 The CSE for Milestones 2000 to 4000 had to satisfy the requirements for their respective milestone on the dates specified in Table 8.1. Though the Contract Acceptance Dates for those deliverables may all have been on the same date, the matched performance and payment for each deliverable was separate and divisible from the matched performance and payment of the other milestones. The parties themselves had apportioned payment and, having regard to the variations in the apportionment, seemingly had done so for agreed equivalents as between the performance to be rendered for each milestone and the payment to be made for that performance: cf Restatement of Contracts, Second, s240; Farnsworth, Contracts, s8.13 (3rd ed). 717 I reject the submission that Milestones 1000 to 4000 were not earned until achievement of Milestone 5000. In the present case GEC Marconi had the right to receive payment for Milestones 1000 to Milestone 3000 and, on being paid for them (as it was), it was not obliged to refund those payments merely because, by wrongfully terminating the contract, it prevented itself from achieving Milestone 5000. The milestone payments had been earned.
(d) The Call on the Financial Securities: Principles and Conclusions 718 The financial security that GEC Marconi was obliged by cl 17 of the Sub-Contract to provide, and the security in fact provided, was an unconditional and irrevocable one that was payable on demand to BHP-IT. There being no question of fraud; cf Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159; and, in my view, no arguable case of unconscionable conduct on BHP-IT's part, the only limitation on its right to demand payment would be a contractual provision in the Sub-Contract limiting that right in some way: see Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 at 459; Hortico (Australia) Pty Ltd v Energy Equipment Co (Australia) Pty Ltd (1985) 1 NSWLR 545 at 552-553; Reid Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1999) 15 BCL 158; see also Washington Constructions Co Pty Ltd v Westpac Banking Corporation [1983] 1 Qd R 179. 719 The Sub-Contract is singularly bereft of any such limiting provision, though cl 41 does make specific provision as to when recourse may be had to the security. Simply by demanding payment from the Bank, BHP-IT did not as such have recourse to the security. It merely changed its form "from security by way of a bank document to a cash security": Malaysia Hotel (Australia) Pty Ltd v Sabemo Pty Ltd (1995) 11 BCL 50 at 58; Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (in liq) (1978) 141 CLR 335 at 351. I do not consider that the provisions of cl 17.5 relating to the release of the financial security requires any qualification of the view I have expressed. That clause was concerned with the duration of the obligation to provide the security. It did not address the form it took: cf Malaysia Hotel (Aust) Pty Ltd v Sabermo Pty Ltd, above, at 56-57. I should add that a consequence of the view I take is that, absent proof that BHP-IT's demand was made in breach of the duty of good faith and fair dealing, GEC Marconi had no possible ground for complaint against BHP-IT arising from its demand for payment from the bank. No such breach as, in my view been demonstrated. For this reason I reject GEC Marconi's claim for interest foregone in consequence of the demand. 720 The sole issue is whether the recourse had by BHP-IT to the security in its cash form was authorised by cl 41 of the Sub-Contract. BHP-IT's purported justification of it was that the three milestone payments were recoverable as of right by BHP-IT as liquidated sums because those payments only became unconditional on achievement of Milestone 5000. I have already rejected BHP-IT's entire obligation submission. Nonetheless at the time of recourse to the cash security, GEC Marconi was in breach of its contract and damages, etc were recoverable from it - albeit in a to-be-ascertained amount. Circumstances thus existed in which the cash security had a continuing role to play under the Sub-Contract. The consequence of this is that, if BHP-IT's recourse to the security was improper and in breach of contract, the best that GEC Marconi could expect by way of relief would be an order restoring the security. I do not need to enter on the question whether it would be held by BHP-IT as a trust fund. 721 In the circumstances any such order would be futile. As will be seen later in these reasons, the amount of the three milestone payments made to GEC Marconi were recoverable by BHP-IT as wasted expenditure. That amount would in turn then be able to be deducted from the "restored cash security" as recoverable damages. For this reason I do not consider it appropriate to make any order in relation to this claim though I should note that in assessing BHP-IT's damages in its cross-claim against GEC Marconi I treat the recourse to the securities as if it had been effective. 722 There is one final matter to which I would draw attention. It has not been suggested that, as a result of GEC Marconi's repudiation, there was a total failure of consideration for the Sub-Contract that would, of itself, have entitled BHP-IT to claim the return of the milestone payments made: cf Roxborough v Rothmans of Pall Mall Australia Ltd (2001) 185 ALR 335. 723 I reject GEC Marconi's claim in relation to the financial securities.
The Conversion of the STUBS emulator 724 This claim is premised upon the proposition that, as copyright owner, GEC Marconi had and retained property in the emulator it built under CR3049. Whether this was so depended first and foremost on the terms of the Sub-Contract. 725 Sub-clauses 27(1) and 27(2) provided: "27.1 Subject to this clause, the title to and Intellectual Property Rights in all Contract Material created by the Contractor and funded by the Commonwealth shall vest in the Commonwealth in accordance with the provisions of subclauses 27.2 and 27.3. 27.2 Copyright (including future copyright) in all Contract Material created by the Contractor and funded by the Commonwealth, including each and every stage of design and construction thereof, is hereby assigned to the Commonwealth." 726 The Sub-Contract defined "Intellectual Property Rights" to include copyright. And it defined "Contract Materials", insofar as is relevant for present purposes, as follows: " "Contract Material" means, …: (a) all material including the Developed Software brought into existence after the date of this Contract; and (b) all material existing at the date of this Contract to be incorporated with the material referred to in paragraph (a) above, for the purpose of performing this Contract, including but not limited to documents, equipment, information and data stored by any means (whether specifically envisaged by this Contract or otherwise), but does not include any tools or methodologies used by the Contractor in performing this Contract except where they are specified in Schedule 3." Emphasis added. 727 Schedule 3 stipulated that there would be no tools or methodologies contained in the "Contract Material". To reiterate, the Sub-Contract defined "Developed Software" to mean software that was to be developed and supplied in accordance with the Sub-Contract and included "any associated integration services". One of the "systems integration services" to be supplied under the Sub-Contract as executed was the provision of "STUBS devices": Schedule 4, cl 1.1. 728 In light of the findings I have made in relation to the Emulation Variation Agreement, the conclusion is inevitable that the emulation software was part of the "Contract Material", and was not a "tool or methodology". The use of emulation, doubtless, can be said to embody a method, ie a "procedure for attaining an object": Shorter Oxford English Dictionary, "method". So also can the use of sealers and gateways to achieve boundary security. Nonetheless the vehicles so employed for these respective ends would, in each instance, be a substantive work product in its own right. Whatever its shortcomings, the emulator was designed and built in the light of the STUBS SIS and the SDD prepared by GEC Marconi, and in accordance with the API Specifications. In consequence of the Emulation Variation Agreement it had an important independent function to perform "for the purpose of performing [the Sub-Contract]". It was to be used for acceptance testing. In light of the implied term I have found requiring the amendment of the contractual documentation to permit acceptance testing with the emulator, the emulator was, in all probability, to be regarded as an "systems integration service" for the purposes of Schedule 4. 729 Having rejected GEC Marconi's contention, I should indicate that there clearly was a variety of "tools and methodologies" used by GEC Marconi in performing the Sub-Contract which clearly were not "Contract Material". These were in the nature of techniques, processes and practices employed in the production of contract material. One example of these was the methodology employed in producing the emulation software. It was that of "rapid prototyping": see Mr Wishart's 23 October letter. 730 I do not regard the evidence of the experts, Dr Lewis and Professor Offen, as being of any assistance to GEC Marconi. Their opinions illuminate the process of emulation and their respective appreciations of the purpose of the emulator in the present case. Their views on the latter matter are of no relevance at all. 731 My conclusion is reinforced by the clear intent of CR3049 itself. It was a contract to develop emulation software for acceptance testing. For the purpose of that contract and of the Sub-Contract it was a deliverable, copyright in which vested in the Commonwealth. GEC Marconi neither owned nor had an immediate right to possession of the emulation software. It could not complain that BHP-IT had converted it. 732 I do not intend formally to assess damages against the contingency that my conclusion is incorrect. I would observe, though, that in its original form the damages claim bordered on the astonishing. It embodied claims both for prolongation costs and for exemplary damages - claims now abandoned.
The termination of the Standing Offer Agreement 733 To understand GEC Marconi's claim in this particular matter, it is necessary to refer in some detail to the purpose and the terms of the Standing Offer Agreement. 734 BHP-IT had been selected to be a member of a panel to supply integration, support and consultancy services to the Department of Defence. That panel was known as the "Defence Preferred Systems Integrator (DPSI) Panel". To facilitate its meeting its obligations to the Commonwealth in respect of any contracts it might obtain from Defence, BHP-IT in turn constituted a panel of service providers from which it could seek quotations for the provision of services. The instruments used to establish the panel were standing offer agreements between BHP-IT and what were referred to as Base Team Members (or "BTMs"). 735 On 6 February 1995 BHP-IT and GEC Marconi entered into such a Standing Offer Agreement (or "SO"). It was to run from 1 December 1994 to 30 November 1997 but could be extended, by agreement, for a further two years. 736 The parties' SO did not confer any right on GEC Marconi to receive any work from BHP-IT or impose any obligation on BHP-IT to offer to GEC Marconi (or any other BTM) any work it might have received as a member of the DPSI Panel. Several clauses of the SO accentuate this. I will refer only to cl 11.1.1 which provided: "Quotations may be obtained from any BTM by BHP IT for work to be carried out under this SO, but nothing in this SO shall require BHP IT to award work to any BTM in respect of a Contract awarded to BHP IT under the DPSI Agreement. However BHP IT will act in a fair and reasonable manner to ensure that, where it is reasonable to do so, the tendered project team undertakes the work share applicable under the Contract." 737 Importantly the SO provided four principal bases upon which the SO itself could be terminated by BHP-IT. The first, which is not presently relevant, was if the BTM failed to carry out to BHP-IT's satisfaction its obligations under any contract entered into with BHP-IT pursuant to the SO: cl 4.1. The second, relating to poor performance, was contained in cl 4.3 and 4.4. These provided: "4.3 The performance of the BTM will be formally reviewed jointly by BHP IT, Defence and the BTM every six (6) months for the first two (2) years and every twelve (12) months thereafter for the period of this SO. BHP IT and Defence shall conduct informal reviews on a monthly basis for the first 12 months or at any other such time that BHP IT or Defence considers appropriate to verify the performance of the BTM. It is BHP IT's intention that the informal reviews should have minimal administrative impact upon the BTM. 4.4 Performance by the BTM will be assessed against the record of the BTM's performance of all Contracts awarded pursuant to this SO and other BHP IT and Defence contracts considered relevant for the purpose of assessing the BTM's performance. Where the BTM is considered to have performed poorly (over a minimum period of twelve (12) months) BHP IT shall have the right to terminate this SO in accordance with Clause 27.1." 738 I would note in passing that cl 27.1 empowered BHP-IT, in accordance with cl 4, to terminate the SO or whole or in part immediately by notice in writing to the BTM without prejudice to any other right of action or remedy which has accrued or might accrue to either party. 739 The third basis for termination was for convenience. Clause 27.5 provided, insofar as presently relevant: "Termination for Convenience a. In addition to any other rights it has under this SO, BHP IT may terminate this SO in whole or in part, by notifying the BTM in writing that this SO or a part of this SO is terminated from the date specified in the notice (which date shall not be a date earlier than the date on which the notice is received by the BTM), and in that event, BHP IT may give to the BTM such directions as it thinks fit in relation to subsequent performance of this SO." The clause went on to provide for mitigation of the BTM's losses arising in consequence of termination, and BHP-IT's provision of an indemnity against liabilities and expenditure resulting from unavoidable losses by the BTM. 740 The fourth basis - which again is not relevant - provided for termination of the SO if BHP-IT's DPSI Agreement was terminated. 741 I should note that the principal issues upon which this case turns relate first and foremost to the construction and interrelationship of sub-cll 4.3 and 4.4 and to the relationship of those provisions with cl 27.5. The latter of these raises the subject of what in the United States is known as "constructive termination for convenience": 64 AmJur 2d, "Public Works and Contracts", s165. 742 The final provision of the SO to which I should refer for the sake of completeness is cl 27.3 which permitted GEC Marconi to terminate the SO in whole or in part by giving thirty days notice in writing to BHP-IT.
(a) The construction and interrelationship of sub-clauses 4.3 and 4.4 743 There is significant disagreement between the parties on the burden of these sub-clauses. GEC Marconi submits that (i) they both contemplated jointly conducted formal and informal reviews and not severally conducted reviews; and (ii) the appraisal of the BTM's performance of contracts envisaged by sub-cl 4.4 was of contracts awarded under the SO or of contracts to which both BHP-IT and Defence were parties. BHP-IT, in contrast, contends that cl 4.4 permitted it to conduct a review of GEC Marconi's performance without the participation of Defence and that in appraising GEC Marconi's contract performance it could consider a contract between GEC Marconi and BHP-IT alone. 744 The meaning of the two sub clauses is, in my view, plain enough and does not wholly accord with either party's submissions. The reviews contemplated by sub-cl 4.3 were joint reviews, whether formal or informal. Sub cl 4.4 did not create a separate reviewing power. It merely identified the focus of a performance review. On its proper construction it permitted appraisal of all contracts awarded pursuant to the SO and, subject to the important limitation of the "considered relevant" requirement, any other contract GEC Marconi had with either BHP-IT or Defence. I consider this to be the natural meaning of the terms used in the sub-clause. And it effectuates in comprehensible fashion the obvious purpose of the performance appraisal regime created in cl 4: appropriate levels of performance were to be expected of contractors involved in Defence procurement. I do not regard the limitation GEC Marconi seeks to put on the contracts that could be considered in the review as either reasonable or required by the terms of the sub-clause.
(b) "Constructive Termination for Convenience": Applicable Principles 745 The following extract from American Jurisprudence 2d sufficiently identifies the purpose and burden of the constructive termination doctrine in procurement law in the United States (64 AmJur 2d, Public Works and Contracts, s165): "If a contract contains a termination for convenience clause allowing the government to terminate a contract in whole or in part and the contracting officer could have invoked that clause instead of terminating, rescinding, or repudiating the contract on some other invalid basis, the court will constructively invoke the clause to retroactively justify the government's actions, avoid a breach, and limit liability. Courts apply the doctrine of constructive termination for convenience on government contract cases when the basis upon which a contract was actually terminated is legally inadequate to justify the action taken." 746 The reason this is of present interest is that GEC Marconi contends that BHP-IT purported to terminate under cl 27.1 for poor performance and that that termination was ineffective and improper. BHP-IT has sought to counter this by contending that, even if the poor performance termination was ineffective, it could have relied in any event on termination for convenience and it can now seek to justify its termination by reference to its cl 27.5 power. 747 Neither party adverted to the United States doctrine to which I have referred, BHP-IT merely asserting its entitlement to avail of cl 27.5. However, its submissions refer, though for other purposes, to a long accepted principle of contract law which, in turn, provided the underpinning for the constructive termination doctrine. It is that when a party terminates a contract and an ineffectual reason or basis is assigned at the time, another reason or basis may afterwards be relied upon to justify the termination, the question being whether, in the circumstances, the party was actually entitled to do what it did even if unaware of all of the circumstances at the time it terminated the contract; Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359; Rawson v Hobbs (1961) 107 CLR 466; Concut Pty Ltd v Worrell (2000) 176 ALR 693; Carter, Breach of Contract, [1006]-[1014] (2nd ed); Chitty on Contracts, vol 1, para 25-013 (28th ed). 748 In the United States termination for convenience seems to have developed originally in government contracting as "a tool to avoid enormous procurements upon completion of a war effort": Krygoski Construction Co Inc v The United States 94 F 3d 1537 at 1540 (1996). Though its province is no longer so limited, it was in a defence procurement setting that the Supreme Court of the United States formulated the constructive termination for convenience doctrine. In College Point Boat Corporation v The United States 267 US 12 (1925), the United States was sued for loss of profit under a contract of which the Naval Department had committed an anticipatory breach. The United States in fact had an unconditional contractual right to cancel the contract, but neither party was aware of that right at the time and no attempt was made at the time of the anticipatory breach to terminate the contract. 749 On the issue of whether the contractor could claim damages for loss of profits flowing from the breach, Brandeis J for the Court, observed (at 15-16): "The question remains whether the measure of damages recoverable for this breach is the same as it would have been if the Government had not possessed the right of cancellation. A party to a contract who is sued for its breach may ordinarily defend on the ground that there existed, at the time, a legal excuse for non performance by him, although he was then ignorant of the fact. He may, likewise, justify an asserted termination, rescission, or repudiation, of a contract by proving that there was, at the time, an adequate cause, although it did not become known to him until later. An unconditional right to cancel can be availed of for the purpose of terminating a contract, even after suit brought, unless some intervening change in the position of the other party renders that course inequitable. Compare Clough v London & Northwestern Ry Co, LR 7 Exch 26, 33 et seq. Ignorance of its right doubtless prevented the Navy Department from taking, shortly after the Armistice, the course which would have resulted legally in cancelling the contract at that time. But the right to cancel was not lost by mere delay in exercising it ... The right remained effective as a limitation upon the Corporation's right to have the Government accept and pay for the mats. This continuing right of cancellation, which was asserted later, in court, operated to curtail the damages recoverable. It limited the value of the plaintiff's right to require performance, and hence the amount and character of the loss for which compensation must be made. Prospective profits were not recoverable." 750 This decision has subsequently been applied in the manner indicated in the above quotation from American Jurisprudence to preclude a damages claim of the type advanced by GEC Marconi in this case: see eg John Reiner & Co v The United States 325 F 2d 438 (1963). As was said in Hancock Electronics Corp v Washington Metropolitan Area Transit Authority 81 F 3d 451 at 454 (1996): "Under settled law, whether [the government] breaches or wrongfully terminates a contract, the event is treated as a constructive termination under the Termination for Convenience Clause. See eg , General Builders Supply Co v United States, 187 Ct Cl 477, 409 F 2d 246, 249 (Ct Cl 1969). The law thus recognises that, in entering into a contract, the government limits its potential liability to the value of the performance rendered at the time it terminates the contract for convenience." 751 The evolution of this doctrine in the United States has clearly been influenced by considerations of public policy and it has been said to be "unique to government contracts": ibid. 752 Termination for convenience clauses have received little attention in Australian legal writing: but for a helpful discussion see Seddon, Government Contracts, [5.4]ff (2nd ed). And I am unaware of any consideration being given at all to the constructive termination doctrine. It is not necessary, though, that I consider in any detail the scope and operation of termination for convenience clauses or that I comment further on the United States doctrine. 753 Subject to a pleading point I will refer to later, the only issue I need determine here is whether a party, by relying on one basis for terminating a contract, is for that reason alone precluded from later relying upon a termination for convenience clause to justify the termination. Subject to what I later have to say about compliance with the requirements of the termination for convenience clause itself and about the relationship of cl 27.1 and cl 27.5; see "Submissions and Conclusions" below; I can see no reason in principle for such a preclusion. It would be inconsistent with the orthodox general principle that, while a termination must be justified by reference to a legal right to terminate, the party terminating may rely on any ground available for termination existing at the time of termination whether or not it was then aware of it: see also Butterworths, The Law of Contract, s7.28 (1999). And I see no reason not to apply that principle in a new setting which would permit later reliance on a termination for convenience clause. In so doing, I adopt with respect the opinion of Brandeis J on this very question in the College Point Boat Corporation case. I acknowledge that the SO was not itself a government contract (an important feature of the College Point Boat Corporation case), though it was entered into as part of the antecedent arrangement put in place for Defence contracting. I am also influenced in my conclusion by the distinctive nature of a termination for convenience clause. Though I accept that the exercise of such a clause would, as of course, be subject to a duty of good faith and fair dealing: Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151; cf Claybrook, "Good Faith in the Termination and Formation of Federal Contracts" (1997) 56 Md L Rev 555; the clause itself, unlike a termination for convenience clause, seems otherwise unconditioned and unconstrained save for its notice requirement.
(c) Additional Factual Material 754 Prior to termination of the Sub-Contract, it seems that on only one occasion was a quotation submitted by GEC Marconi for inclusion by BHP-IT in a DPSI Panel member tender. That occurred on 27 November 1995. The quotation was included in BHP-IT's Best and Final Offer that was submitted on 25 November 1996. On the same day as it sent GEC Marconi the notice terminating the SO, BHP-IT informed GEC Marconi that it had removed it from this tender. The reason it assigned for its action was that GEC Marconi had "performed very poorly on the ADCNET project". The Commonwealth did not proceed with the project in question and did not let a tender for it. 755 The SO was terminated by notice on 24 January 1997. Omitting formal parts the Notice stated: "TAKE NOTICE THAT BHP IT considers that EASAMS has performed poorly on the contract between BHP IT and EASAMS dated 14 September 1994 (Contract Agreement No ADC-001) for the software development and systems integration on the ADCNET project as a result of which BHP IT HEREBY notifies EASAMS that the Standing Offer is terminated with immediate effect in accordance with Clause 27.1 of the Standing Offer." Emphasis added. The accompanying letter was in similar though less formal terms. I note in passing that that termination was expressly linked to cl 27.1 and not cl 27.5 (termination for convenience). Roger Cooke's evidence is that GEC Marconi received the notice on or about the date of the notice. 756 The only communication between the parties that is in evidence which relates performance of the ADCNET contract to the SO was a letter from Mr Haddad to Mr Sharp of 17 April 1996. Insofar as presently relevant, it stated: "Please find enclosed BHP IT's response to the alleged Notice of Breach issued by EASAMS. BHP IT's Group General Manager, Ian Dart, has asked me to pass onto you his extreme concern and disappointment at EASAMS' position which will also impact BHP IT's approach on DPSI. BHP IT is astonished that you have adopted this aggressive stance at this very late stage given BHP IT's and DFAT's repeated attempts to accommodate EASAMS' delays and some 18 months of apologetic representations by EASAMS' executive regarding the delays to the project resulting from your admitted lack of adequate resourcing." 757 BHP-IT further relies upon what it says is evidence demonstrating GEC Marconi's poor performance of the ADCNET Sub-Contract in 1995 and 1996 to justify its belief. That evidence is dealt with in detail later in these reasons: Part III, The Repudiation Claim. 758 Finally, there is no evidence to suggest that prior to the Notice, BHP-IT and Defence had conducted a review of GEC Marconi's performance of (inter alia) the ADCNET contract.
(d) Submissions and Conclusions on Liability 759 There is, in my view, no doubt that the termination on 24 January was made in reliance on the power given by cl 27.1. And the reason for it was an alleged judgment of poor performance made under cl 4.4 after a review under cl 4.3. A termination relying on that power for that reason would clearly be ineffective. On the view I take of the proper construction of cll 4.3 and 4.4, I am not satisfied (and there is no evidence suggesting otherwise) that a joint review (formal or informal) was undertaken with Defence that encompassed GEC Marconi's performance of the ADCNET contract and that led to the agreed view that it had "performed poorly … over a … period of twelve … months": cl 4.4. Unless the termination is able to be justified on other grounds, it was clearly wrongful. 760 BHP-IT submits the termination was justifiable by reference to its power to terminate for convenience. That clause, it is said, required no more than the communication of an intention to terminate, and the letter and Notice of 24 January 1997 sufficiently communicated that, albeit it referred to cl 27.1. 761 GEC Marconi contends, first, that BHP-IT did not plead cl 27.5 in its defence to GEC Marconi's claim and should not now be entitled to rely upon it. My response to this is that while raised for the first time in written submissions, GEC Marconi has not claimed to be prejudiced by this defence. Given the nature of this defence and the general invitation I have given the parties to put in further submissions on matters that arose during submissions, I reject GEC Marconi's pleading argument. 762 Secondly, it is submitted that having referred to cl 27.1, BHP-IT should not be allowed "to rewrite history" in the way it proposes by relying on cl 27.5. The parties have agreed specific mechanisms having different consequences for terminating the SO in whole or in part. A party was entitled to know which termination ground was being relied upon so that it could adopt a position accordingly. Further, it is said, there is no evidence that BHP-IT intended to terminate for convenience. Finally, in contesting BHP-IT's reliance upon evidence of poor performance, GEC Marconi has contended that BHP-IT was not so much concerned with GEC Marconi's performance as with the fact that it had terminated the ADCNET contract. 763 My own view is that BHP-IT was entitled to invoke cl 27.5 and, perhaps fortuitously, it has satisfied the requirements of that subclause. A notice to terminate either under cl 27.1 or cl 27.5 did not require that it state the ground on which the termination was based. The notice requirements were (a) in the case of a cl 27.1 notice, the stipulation as to writing and the communication that the SO was terminated "immediately"; and (b) in the case of a cl 27.5 notice, a like stipulation as to writing and the communication that the SO was terminated from a date specified in the notice than was no earlier than the date the BTM received the notice. 764 In the present case, the notice was in writing and, while the notice was to take immediate effect, the notice of termination was received on the date of the notice. Though Roger Cooke's evidence on the latter matter referred only to receipt of the notice "[o]n or about 24 January 1997", this was a matter that I raised with GEC Marconi during oral submissions and it was not suggested that it was received otherwise than on 24 January. I note in passing, though the parties have not relied on this and therefore I do not, that the letter and notice appear to be part of a composite facsimile communication of 24 January that indicated that the, presently relevant, accompanying material was to be hand delivered "in the next hour". I am, though, prepared to infer from Mr Cooke's evidence and the response made in oral submissions that the notice was received on the date it bore. 765 Clause 27.5 refers to a date being specified in the notice on which the termination is to take effect. I am satisfied, nonetheless, that the apparent failure formally to specify a date in circumstances in which the notice was intended to take "immediate effect" and was received on the date it bore, did not constitute an operative failure to comply with the requirements of cl 27.5. Both the notice and the accompanying letter conveyed to GEC Marconi that the SO was terminated on and from the date of the notice. Given it was received on that date, the sub-clause had been complied with: see the observations of Kirby J on construction in Pan Foods Company Importers and Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 74 ALJR 791 at [23]-[25]. 766 The reference in the notice to cl 27.1 does not preclude BHP-IT from relying upon cl 27.5. BHP-IT was asserting unequivocally that it was ending the parties' contractual relationship - it had already done likewise with the Sub-Contract - and this was all that it otherwise was required to do to satisfy cl 27.5. Having regard to the saving of other rights and remedies in cl 27.1, that sub-clause did not purport to have an exclusionary effect in relation to termination such that other grounds could not be relied upon to justify a termination that was ineffective on cl 27.1 grounds: see Carter, Breach of Contract, [1014] (2nd ed). 767 Though the consequences of terminating under cl 27.1 and cl 27.5 could differ (because of the mitigation and indemnity provisions of cl 27.5), I do not consider that those consequences precluded the use of cl 27.5 in the manner I have indicated. There was no operative difference in fact between the two in the circumstances, given that GEC Marconi had been removed from the DPSI Panel tender. 768 Considered simply as a termination for convenience, the notice was, I consider, an effective notice. Notwithstanding that GEC Marconi had quoted for, and been included in, a tender under the SO, BHP-IT had indicated to GEC Marconi after the first notice of breach had been served that its conduct in the Sub-Contract relationship could affect BHP-IT's approach to it in the SO relationship. I do not consider that there was anything impermissible in BHP-IT's giving this indication or, in fact, in acting upon it. After GEC Marconi's wrongful termination of the Sub-Contract with its consequential effect on BHP-IT (because of its own contract with the Commonwealth), it was understandable that BHP-IT might wish to terminate its business relationships with GEC Marconi. The SO embodied one of these. The circumstances are far removed from those capable of suggesting a breach of the duty of good faith and fair dealing in effecting the termination on cl 27.5 grounds. 769 I reject GEC Marconi's claim of wrongful termination.
(e) Other matters 770 I do not intend to proceed to assess damages against the contingency that my conclusions on liability are incorrect. I would say, though, that on the twin assumptions that GEC Marconi's termination of the ADCNET contract was wrongful as was BHP-IT's termination of the SO, GEC Marconi's claim for damages seems a particularly weak one. It had no right to receive work from BHP-IT; the likelihood of it being offered work in fact was highly questionable; and there are very real question marks over how realistic the chances were of GEC Marconi possibly securing the three lost opportunities it identifies. 771 Even if GEC Marconi's termination of the ADCNET contract was lawful, I rather doubt that this would have strengthened in any way its damages claim for breach of the SO.
(a) The Contractual Setting 778 I need to refer to three separate subjects dealt with in the Sub-Contract. The first related to the keeping of a diary. Clause 12.1 and Schedule 2 required GEC Marconi to maintain a diary of events "that affect the Contractor's ability to work in accordance with the Project Plan contained in Schedule 7". Clauses 12.2 and 12.3 provided: "12.2 The Contractor shall forward to the Delegate at the end of each calendar week unless otherwise agreed between the Parties a copy of the diary entries for that week. If the Delegate agrees with the statement of facts recorded by the Contractor the Delegate shall sign the Diary within 8 days of receiving a copy of the entry. 12.3 If the Delegate disagrees with the statement of facts recorded by the Contractor the Delegate shall record its version of facts in the Diary. If the Delegate does not record a disagreement with the facts stated in the Diary within 8 days, the Diary shall be prima facie evidence of the facts recorded therein." Emphasis added. 779 The second subject was the granting of extensions of time on account of delay. It is necessary, unfortunately, to set out this wordy provision in full. Clause 46 provided: "46.1 Where in the Contractor's reasonable opinion there is likely to be a delay of no less than one day in the Contractor discharging an obligation under this Contract because of a cause beyond the reasonable control of the Contractor (except a cause arising out of any act or omission on the part of the Contractor's employees, agents or sub-contractors or their employees or agents) which the Contractor considers justifies an extension of the time specified in this Contract, the Contractor shall: (a) notify the Customer in writing as soon as possible after the Contractor has formed that opinion of the facts which the Contractor considers give rise to such a delay, develop strategies to manage the consequences of the delay and submit to the Customer a copy of the proposed variations to the Contract pursuant to clause 11; and (b) immediately after the Contractor is aware that the circumstances causing the delay have ceased, notify the Customer in writing of the period of delay so caused, give details of the likely effect on this Contract and request an extension of time which the Contractor considers reasonable in all the circumstances. 46.2 The Customer shall give consideration to the Contractor's request and shall, within 11 days after receiving a notice under paragraph 46.1(b), notify the Contractor of its decision. Where the delay has arisen from a cause beyond the reasonable control of the Contractor the Customer shall not refuse a request for extension of time without reasonable grounds for doing so. In the event that the Customer does not respond within 15 days of receiving a notice pursuant to clause 46.1(b) the extension of time requested by the Contractor shall be deemed to be granted. 46.3 Notwithstanding that the Contractor has not given notice under subclause 46.1, where the Customer considers that a delay has arisen, in whole or in part, because of an act or omission on the part of the Customer or its employees or agents then the Customer may, by notice in writing to the Contractor, extend the time for performance of the relevant obligation of the Contractor by nominating in the notice a date for such performance and the date so specified shall, for the purposes of this Contract, be the date for performance of that obligation." Emphasis added. 780 The third subject related to delay costs. Clause 47 - again wordy - provided: "47.1 Subject to compliance with all of the provisions of subclause 47.2, the Contractor shall be entitled to recover from the Customer reasonably foreseeable costs and expenses unavoidably sustained and incurred by it as a result of delay in the integration of the System by any cause or causes beyond the control of the Contractor being an act, default or omission on the part of the Customer in the performance by the Customer of its obligations under this Contract: emphasis added. 47.2 The entitlement of the Contractor to recovery of costs and expenses incurred by it as a result of delay in the integration of the System referred to in subclause 47.1 shall be subject to compliance with the following conditions: (a) an extension of time has been granted or should properly have been granted pursuant to clause 46; (b) the Contractor has taken all practicable steps to keep any such damages to a minimum; and (c) the Contractor has given to the Delegate details in writing of the nature of the claim under subclause 47.1 as soon as practicable after commencement of the delay giving rise to the claim and at a time when those details are capable of being adequately checked by the Delegate, such details being given progressively where necessary. 47.3 This clause 47 does not derogate from any right of the Contractor to recover damages for delay not recovered under this clause." 781 I have emphasised the reference to "delay in the integration of the System" for this reason. The interpretation provision of the Sub-Contract defines both "System" and "Integration". I have referred to these definitions over 200 pages ago. I will repeat them. They are as follows: " 'System' means the working system which complies with this Contract and comprises the [Contractor Supplied Equipment] and [Customer Supplied Items]. 'Integration' in respect of the System includes the integration services as set out in Schedule 4." The Schedule 4 services cover amongst other things the design, development, integration and testing of the Developed Software. 782 The reason I focus on this particular matter is that the Commonwealth, in the interpretation it seeks to place on the reference to "the integration of the System" in cl 47.1, contends that the word "System" is used in the narrow sense conveyed by the definition of that word. GEC Marconi for its part contends that the entire phrase as used in cl 47.1 reference conveys no less than what is conveyed by the definition of "Integration" above.
(b) The Basis of the Claims Made 783 GEC Marconi, as I have indicated, has founded its claim first and foremost on the diary entries it made. It notes that, by virtue of cl 12.3, if Mr Brent did not record disagreement with the statement of facts contained in an entry, then the entry was "prima facie evidence" of those facts. Thirteen of the nineteen diary entries in issue have the stamp "approved" on them. 784 It then contends that no particular formality for an extension of time was required other than that there be a written request for an extension. The diary entry was sufficient for that purpose, as it was for the purposes of cl 47. Alternatively it is said that the relevant notifications were provided in correspondence to which I will refer below, or else BHP-IT is estopped from asserting there was no adequate notifications. 785 The Commonwealth defends these claims on three bases. The first is that GEC Marconi failed to fulfil the requirements of cl 46 and cl 47 of the Sub-Contract and that the Commonwealth was not estopped from setting up this failure ("Non-compliance with cl 46 and cl 47"). Secondly, as delay costs could only be recovered where "integration of the System" was delayed, GEC Marconi could not seek payment for delay and prolongation as it had not reached that stage of contractual progress under the Sub-Contract ("the integration defence"). Thirdly, it was a condition precedent to the right to be paid for a delay and prolongation claim that the software to be developed be completed and delivered at Milestone 5000 ("the entire obligation defence"). 786 Given the agreed facts for each diary entry, the approach I intend to take is to consider first the defences raised by the Commonwealth. If any of these can be maintained, GEC Marconi's claim must fail.
(i) Non-compliance with cl 46 and cl 47: The Diary Entries 787 GEC Marconi's submission on this matter can be put in the following general terms. The burden of Clauses 46 and 47 was to: (a) identify the particular fact, matter or circumstance causing a delay; (b) identify, as far as was possible, the period of that delay; (c) enable BHP-IT/the Commonwealth to assess the cause and period of delay; and (d) allow for an appropriate extension of time. The relevant diary entries: (a) identified the facts or the circumstances causing the delay; (b) identified, so far as it was able to do so, the period of delay; (c) enabled BHP-IT/the Commonwealth the assess the cause and period of delay; and (d) notified a request for an extension of time. In consequence the diary entries and their communication to BHP-IT/the Commonwealth satisfied each of the requirements of clauses 46 and 47. 788 I should preface my own consideration of this matter by making the following comments on cl 46. The two step procedure envisaged by cl 46.1 - ie notification that there was likely to be a delay of no less than one day (cl 46.1(a)) and notification after the circumstances causing the delay have ceased with a request for an extension (cl 46.1(b)) - must be construed and applied in light of the myriad of contingencies which the extension of time provision was clearly intended to accommodate. I do not consider, for example, that reasonable parties standing in the shoes of BHP-IT and GEC Marconi would have intended that there be strict compliance in all cases with the requirements of cl 46.1(a), although that provision manifests a clear intent to deter the making of extension claims for delays anticipated to be of short duration. 789 I am satisfied, though, that the parties would have intended that there be compliance with the provisions of cl 46.1(b). My reasons for this view are as follows. First, given the back-to-back nature of the ADCNET contracts, the administration of the mechanism for the granting of extensions was obviously intended to be uniform and to be complied with according to its terms. The parties clearly would not have countenanced cl 46.1(b) being administered in a fashion that could give rise to the possibility of the same delay event having differing consequences as between the two contracts - a matter to which I later return. Moreover, given the significance of the subject matter of an extension request, I consider that they would have intended that the formalised procedure prescribed would be adhered to as this would be conducive to maintaining reliable and accurate contract documentation: cf McMahon Constructions Pty Ltd v Crestwood Estates [1971] WAR 162. Finally, as an extension may be deemed to be granted if no response to it was made within 15 days of receipt of the cl 46.1(b) notice, it is unlikely that parties would have agreed to such an effect unless an identifiable "notice" of the prescribed variety was in fact received. 790 GEC Marconi has submitted that cl 46.1(b) did not prescribe any particular formality other than that there be written notification of the period of the relevant delay and a request for an extension. 791 This, in my view, understates what cl 46 requires. While no particular form was prescribed for its "notice", cl 46 envisaged a document created (i) specifically for the purpose of an extension claim, (ii) at a particular time (ie "immediately after" etc) and (iii) with a particular content that included not only notification of the period of the delay but also a request for an extension of time which the Contractor considered to be reasonable in all the circumstances. I emphasise the "but also" for this reason. Clause 46 was not concerned merely with delay as such. Its focus was on delay which justifies an extension of time. Delay in a particular activity need not necessarily have delayed completion of the contract: cf Halsbury's Laws of Australia, vol 3(2) "Building and Construction", 65-1035. As will be seen, Les Cook was alert to this in his letter to BHP-IT of 12 October 1995. 792 Contrary to GEC Marconi's submission, I am not satisfied that the diary entries which were created and which were required to be submitted to BHP-IT in compliance with the distinct contractual regime imposed on GEC Marconi by cl 12 of the Sub-Contract, could serve as well as surrogate notices for cl 46 purposes in the absence of agreement between them that such could be the case. 793 It is the case that a diary properly maintained under the Sub-Contract would record delaying events and their impact. Schedule 2 required the recording of "events that effect the Contractor's ability to work in accordance with the Project Plan". It was equally open to GEC Marconi to develop a diary containing further information. Its diary in fact contained an "Action Required" heading. BHP-IT was required to review the diary on a weekly basis and to record whether or not it agreed with "the statement of facts" recorded by GEC Marconi. Thirteen of the diary entries in issue here had an "approved" stamp on them. That agreement, though, went no further than an agreement with such facts as were stated. Where, as in Diary Entry 17, the "Action Required" was stated to be (inter alia) "1. Extend project schedule by 0.5 day" that agreement did not extend to this such that a contract variation was then and there agreed. A "fact" was not being agreed to. Moreover, as cl 12.4 of the Sub-Contract stated the diary did "not operate as a modification, variation or amendment to" the contract. 794 When one has regard to the particular diary entries in question here, it can reasonably be said that some do contain information of the type to be expected of a cl 46.1(b) notice. Such entries, though, were not brought into existence for cl 46.1 purposes - though they clearly could have been the heralds thereof - and they did not reflect its purposes. When agreed to by BHP-IT (or when agreement was deemed), that agreement was for no purpose other than the purposes of cl 12 of the Sub-Contract. 795 Unless the parties agreed to the contrary, if an extension request was to be made, it needed to be a request separate from the making of a diary entry for cl 12 purposes. Though this may well have required some duplication in the communications made, it reflected what I consider to be the regime prescribed in the Sub-Contract. 796 For this reason alone GEC Marconi's claim must fail to the extent that it is based on the diary entries. I would add, though, that even if diary entries were capable as well as serving the purpose of a request under cl 46.1(b), I do not consider that any of the entries in issue would reasonably have brought home to BHP-IT that when it was conducting its prescribed review of the diary it was also being asked to consider a cl 46 request for an extension of time. Some number of the entries made no estimate of the extension of time requested at all. Others stated that the impact of the delay was yet to be determined. This said, many of the diary entries would have suggested to BHP-IT the real likelihood of an extension request and a cl 47 delay claim being made in light of the event (and its impact) described in the diary entry. 797 Fundamental to a delay cost claim under cl 47 was the grant or deemed grant of an extension under cl 46.2 and cl 46.3. The lack of such an extension would in turn be fatal to the delay cost claim made by GEC Marconi. For the reasons I have given, the diary entries themselves were incapable of bringing cl 47 into play because they did not enliven cl 46.2.
(ii) Non-compliance with cl 46 and cl 47: Estoppel 798 GEC Marconi have submitted that, if the diary entries were not of themselves sufficient notification of extension requests under cl 46.1(b) as a matter of construction of the Sub-Contract, nonetheless GEC Marconi and BHP-IT conducted themselves as if they were, such that BHP-IT is estopped from contending that they were insufficient for that purpose. 799 This submission related to communications made between August and December 1995 involving Diary Entries 1 to 25 to which it is necessary to make brief reference. 800 (1) By August 1995 both BHP-IT and GEC Marconi were pushing for a schedule extension to the ADCNET contracts and negotiations to that end were on foot. On 4 August Mr Brent wrote a letter to Mr Pears that included the following: "Further to our discussions I wish to confirm that in order to progress negotiations on the proposed schedule extension I require the following information from EASAMS: . formal agreement that all EASAMS claims for schedule extension and delay costs would be formally waived when agreement is reached on current negotiations for schedule extension; . formal presentation of a schedule establishing the new baseline and demonstrating the capacity/capability of the ADCNET team to meet the new schedule; . a consolidated list of pending claims itemising description of the claim, impact in no of days from the overall project schedule and cost." 801 Les Cook had by then clearly acknowledged that some level of claims for schedule extension and for delay costs were justified. On 10 August he wrote to Mr Brent in (inter alia) the following terms: "This minute provides the Department's requirements for agreement on an extension to the Release 3 firm price contract schedule." Emphasis added. BALANCE OF EFFECTS ON THE RELEASE 3 PRICE From our analysis of the diary entries we believe that any claim for 8 weeks extension in time or for $800,000 in costs would be excessive. Any such claim would be accompanied by detailed justification, but we do not accept that claims exceeding $250,000 could possibly be justified. … DELAY CLAIMS It will be agreed that all events occurring prior to the date of the contract change will not be subject to claims under contract clauses 46 and 47." 802 GEC Marconi supplied BHP-IT with a proposal for the way forward in the schedule amendment negotiations which was prefaced by the following summary of the situation relating to delay claims: "1. Delay Claims The consolidated delay claim for the Diary entries up to entry 25 and the claim for lack of CSI supplied staff results in a seven week schedule extension and a cost reimbursement of $285000. Details of the delays can be made available should you so require. This does not include any impact for lack of STUBS delivery which was contracted to be supplied in 1 August 1995 and will become critical from 28 August 1995. The cost for delay in STUBS delivery will be about $1300 per hour with, as a minimum, a corresponding schedule extension on an hour by hour basis." 803 Subsequent discussions were held with DFAT concerning the delay proposals which led Mr Brent to make the following request of GEC Marconi on 29 August 1995. "1. EASAMS will, as a matter of high priority, prepare a detailed submission to BHP-IT setting out; - separate details for each delay incurred by EASAMS on the current fixed-price project. This will include the reasons for the delay, the party to which EASAMS considers the cause of delay is attributable as well as the cost and time associated with each delay. The time effect of each delay occasioned by EASAMS is also required." 804 On 11 September 1995 GEC Marconi wrote to BHP-IT to submit its "detailed proposal to amend the ADCNET Contract". The letter indicated that the proposal took into account a number of matters including delay claims up to Diary Entry 25. It proposed that the "delay costs" be offset against GEC Marconi's exposure to potential damages so that "[t]his would not result in a change in the contract price". 805 The proposal itself was contained in Appendix A which in turn referred to, and had attached to it, Attachment 1 relating to delay claims. The Appendix stated that the total impact of the claims as detailed in the Diary to Entry 25 and/or inadequate supply of CSI personnel was "between 7 and 8 weeks". The Attachment opened with the following: "Delay claims - Diary entries and CSI personnel The following constitutes the delay claims for Diary Entries 1 to 25 and for lack of CSI personnel to date. The delay can be estimated in two components. Firstly the cost of effort which was in our view wasted. In most cases we were able to redeploy some of the staff on other activities, however this was not possible for all staff or for all diary entries. Secondly the cost of extending the project schedule by the number of hours impacted for each entry. The cost of extending the project is limited to the Project Management/Administrative functions only. These are made up of the Project Manager; Project Controller; Development, T&I and Systems Engineering managers; Admin staff; Systems Administrator; ten percent of the team leader effort." Under the headings "Entry No. Rational (sic) for Claim" it referred sequentially to Diary Entries 1 to 25 and gave brief (usually less than one line) descriptions of the basis of the claim. Many of the claims so noted were for schedule extensions of four hours or less. 806 On 12 September Mr Haddad of BHP-IT wrote to Mr Pears outlining the arrangements that had been agreed between the parties regarding the contract amendment proposal. His letter included the following: "(c) any claims for delays and associated costs that EASAMS, BHP-IT or the Department may have with respect to any events which occurred prior to the date of the amendment shall become void at the date of its issue. … We will advise you of our progress and address with you any amendments to the preceding which may become necessary as a result of our discussions with the Department, prior to our reaching any formal agreement with the Department." 807 BHP-IT then wrote to Mr Skinner on 15 September concerning the proposal for a contract amendment. In this letter it stated: "Following your request BHP-IT has reviewed all aspects of delays [occasioned by the parties involved] and shares the Department's view that the matter is best dealt with in two stages: 1. A detailed review of both claims for delay and any associated cost effects, and costings for additional work as a result of change of scope; and 2. Provided that the Department is not financially disadvantaged the matter be resolved by way of one major contract amendment which offsets additional Contractor costs against money that would be payable to the Department in respect of the delays." It then went on to state its own view of what those delays and costs were. It gave as its own view that of an overall expected delay of 11 weeks to completion date, 7 weeks were attributable to DFAT, of which 5 were "clearly demonstrable while the remaining two were a matter of debate. 808 In his 26 September letter formally notifying the cancellation of STUBS Les Cook observed: "As explained to the PSI on a number of occasions, the Department is not yet convinced of the validity of several of the claims for excusable delay. In particular, it is not clear that any reasonable delay mitigation strategy was applied as is required by the contract. If an overall agreement can be reached which is fair to both sides, then further detailed examination of these claims, probably by an independent arbitrator, may not be necessary. The Department considers that any such agreement must include a strategy for STUBS replacement. If the PSI will not accept this approach, it should proceed with formal claims for excusable delay immediately. I note that no such claim has yet been received despite the contractual requirements that they be lodged immediately after the cause has ceased." 809 Replying to this on 4 October 1995 Mr Brent stated: "… I believe that consideration of our proposal by the Department should not be predicated on work associated with the development of the STUBS replacement strategy. In this context the Department should be aware that our proposal for contract extension is also our claim for delay costs and schedule impact." 810 Les Cook responded on 12 October 1995 in terms that included the following: "The Department does not accept that the PSI's proposal for contract amendment constitutes a valid claim for excusable delay. The only formal communication of this proposal is in your letter KB-697 of 15 September 1995 (note: BHP-IT has informed me that the date on the letter was in error and should be 15 September). That letter and its attachment do not provide any detail of individual events for which claims may be made, indeed the letter contains two quite different estimates of the total delay which might be claimed. The attachment to the letter states that 'substantiating detail has been made available to the Department's ADCNET project manager'. Whilst some spreadsheets were provided separately and informally, these certainly did not amount to a justification of a claim in each instance and there were major errors which the Department brought to your notice. No corrected and augmented data has been received. The situation remains that no formal claims have been made as required by the contract, despite the fact that some of the events occurred and ceased more than a year ago. If formal claims are made, they must include details adequate to demonstrate that the contractor performed 'all practical steps to keep any such damages to a minimum'. Vague statements about overtime, redeployment etc. will not meet the requirement for substantiation. The information in the draft spreadsheets clearly indicates that no such steps can have been taken in most instances. As one typical example, there is the claim that a delay of 40 hours affecting only one technical author caused a 40 hour schedule delay. This would be the effect if the entire project team were sent on leave for the whole 40 hour period: any delay mitigation strategy would have reduced the effect from this worst case. The Department remains willing to avoid a protracted examination of the details of each claim, provided that an overall position can be reached which both sides consider to be fair and which allows the project to move forward to a successful completion." 811 On 1 December Mr Sharp wrote a letter to Mr Brent which concluded with the following: "It is noted that the EASAMS contract currently requires delivery of the Canberra system on the 15th January 1996, plus some minor extension arising from CCPs. I do however believe that it is jointly recognised by both BHP and DFAT that this date was to be extended to the 7th June 1996 as a result of previous negotiations. Given the agreement from these past negotiations and the recent requirement to develop an alternative to the STUBS device, we seek your support of a contract change formally amending the Contract delivery dates." The source of that belief has not been revealed in evidence. 812 On 5 December 1995 Les Cook reiterated to Mr Brent DFAT's view that it was not prepared to agree to an extension of the project schedule outside the contract mechanisms of change requests and claims for excusable delay except in the case of a comprehensive agreement. 813 In January 1996 BHP-IT and GEC Marconi agreed CR30 which amended Schedule 8 Table 8.1 of the Contract to add 15 days to all milestones commencing with TRR. 814 Finally there are in evidence BHP-IT internal communications of September 1996 which record the "delay claims" made in Diary entries since Diary Entry 25. The primary record was a "Diary Entry Filing Register" indicating that in each case no cost of any claim was made. 815 GEC Marconi's submission would seem to be that Appendix A and Attachment 1 to its 11 September 1995 letter to BHP-IT constituted notification of a claim for delay for between 7 and 8 weeks. As this letter was not responded to there was a deemed extension under cl 46.2. In the alternative it is submitted that if BHP-IT's response about schedule extension proposals being put to DFAT constituted a sufficient response, the 11 September letter was at least a sufficient notification for cl 46.1(b) purposes. 816 GEC Marconi goes on to submit that in making its 15 September proposal to DFAT, BHP-IT accepted that GEC Marconi was entitled to prolongation of between 5 and 7 weeks. At no time, it is said, did BHP-IT ever indicate that it required any further or different documentation in order for GEC Marconi to advance any of its diarised delay claims or any claims the subject of the consolidated claim. 817 In this proceeding there have been many counterfactuals with which I have had to deal. I would have to say that, to treat the documentation prepared by GEC Marconi for the purposes of the ongoing contract schedule negotiations as if it embodied notifications under cl 46.1(b) of the Sub-Contract when provided to BHP-IT on 11 September, would merely add to those counterfactuals. The documentation was not prepared for that purpose. It was one part of a composite proposal to be used by BHP-IT in negotiations with DFAT for a general contract extension. That proposal came to nothing. No extension was agreed. 818 There is nothing in the correspondence to indicate reasonably to BHP-IT that a request for a contract extension which GEC Marconi considered was reasonable in the circumstances was being made of it and required its separate response. The object of the exercise, as was well understood both by BHP-IT and GEC Marconi, was that they were attempting to contrive a favourable extension to the ADCNET contracts. And what was being proposed would, if agreed, result in any claims for delay and associated costs relating to events occurring prior to the extension becoming "void". Independent resolution of requests for extensions and delay cost claims was neither expected by GEC Marconi or by BHP-IT nor sought by GEC Marconi. Clauses 46 and 47 were not being activated. The tenor of the documentation in its setting was that GEC Marconi had delay claims available to it - but claims it had not as yet made under the Sub-Contract. 819 Even if, contrary to my view, the 11 September communication could be contorted into a cl 46.1(b) notification and request, I do not accept that there has been a deemed agreement to the extension under cl 46.2. No certain period of extension was sought or could be deemed to have been agreed to. And BHP-IT made plain to GEC Marconi that it was DFAT's response to the proposal being put that would ordain such project extension outcome from the negotiations as there might be. Such was the rationale of BHP-IT's initial solicitation of documentation from GEC Marconi from 4 August 1995 onwards. 820 I am unable to accept that BHP-IT and GEC Marconi either understood, or intended, that the 11 September documentation would enliven cl 46.1(b) of the Sub-Contract. The consolidated claim was clearly inapt for the purpose in any event. Nor do I consider that the communications between the parties were capable of founding an estoppel which could preclude BHP-IT from setting up the requirement of cl 46.1(b). 821 I would add that the submission GEC Marconi has put on the correspondence merely reinforces the view I earlier expressed that parties in the position of the Commonwealth, BHP-IT and GEC Marconi would have intended that there would be adherence to the formalised procedure of cl 46.1(b). If acceded to, GEC Marconi's submission could well have resulted in an extension occurring in the Sub-Contract on account of conduct for which the Commonwealth was responsible, but which was not replicated in the Head Contract. This was not something the parties would either have envisaged or countenanced. 822 GEC Marconi has advanced the alternative submission that, because BHP-IT had reached the view that delays attributable to DFAT of 5 to 7 weeks had occurred and were reflected in Diary Entries 1 to 25, it could have exercised its discretion to grant an extension under cl 46.3. Because it was obliged by cl 5.6 of the Sub-Contract to exercise powers conferred on it in a reasonable manner, BHP-IT and, ultimately, the Commonwealth were obliged to grant an extension of time. 823 The short answer to this is that any response to be made by BHP-IT presupposed a parallel response by the Commonwealth - and GEC Marconi well understood this. Once the Commonwealth contested the validity of the "claim for excusable delay" made in BHP-IT's 15 September 1995 letter (it did this in its 12 October letter), BHP-IT could not be said to be acting unfairly and unreasonably in "failing" unilaterally to grant an extension. 824 I should add that I refrain in any event from expressing a view on whether the cl 46.3 power could be converted in any circumstances into a duty by virtue of the cl 5.6 obligation such that GEC Marconi could complain of a failure to exercise that "duty".
(iii) The Integration Defence 825 I have already foreshadowed this defence. The Commonwealth's contention is that the phrase delay "in the integration of the System" means delay in integration of the Developed Software with the CSI. If the Developed Software was not in existence and was not available for integration, there could not be a recoverable delay cost for the purposes of cl 47 of the Sub-Contract. The construction so advanced turns critically, as I have earlier indicated, on the meaning given by interpretation provision of the Sub-Contract to "System". 826 For its part GEC Marconi submits that "in the integration of the System" must be read in its setting and particularly in light of cl 46 with which cl 47 is related. An extension of time under cl 46 could be granted in respect of delay in each step of the process of software development leading up to the integration of the Developed Software with the CSI. A delay giving rise to such an extension of time would necessarily involve a delay in the integration of the System itself and, as such, would be compensable under cl 47. Particular emphasis in this submission is placed, as I have indicated, on the interpretation given by the Sub-Contract to the term "Integration". To reiterate, it provides that " 'Integration' in respect of the System includes the integration services as set out in Schedule 4". Those services in turn include software design, development, etc. 827 For my own part, I consider that the interpretation placed by GEC Marconi on cl 47 is that which was intended in the ADCNET contracts. I do not consider that the parties intended to isolate only a very limited phase of the contract in which to allow recovery of delay costs under the contracts leaving most of the delay costs incurred in the contract period to a common law claim under cl 47.3. Such an intention becomes the less probable given that cl 46 deals with delay across the period of the contracts and cl 47 delay costs were conditioned on a cl 46 extension of time. I consider the phrase "in the integration of the System" was intended as a shorthand reference that included the System Integration Services of Schedule 4. 828 The Commonwealth's submission invites me to attribute to the parties what I consider to be an improbable intention and one, moreover, without obvious commercial justification.
(iv) The "Entire Obligation" Defence 829 I can deal with this matter briefly as it is without merit. In dealing with GEC Marconi's claim that BHP-IT wrongfully called on the financial guarantees I rejected BHP-IT's submission that the payments to GEC Marconi for Milestones 1000 to 3000 were conditional upon its achievement of Milestone 5000. The Commonwealth's "entire obligation" defence here does no more than recycle the submission made by BHP-IT on the financial guarantees.
(d) Conclusion 830 I have rejected GEC Marconi's claim for delay and prolongation costs under cl 47.2 of the Sub-Contract. Such right as it has to claim damages on account of culpable delay by BHP-IT exists at common law. The "agreed facts" do not address this matter. Neither do the submissions that have been made. This claim will be stood over for further hearing on a date to be fixed.
PART III: BHP-IT's FIRST CROSS-CLAIM 831 This cross-claim encompasses distinct claims, first, against GEC Marconi and, secondly, against GEC Marconi Australia Pty Ltd. The principal claim made against GEC Marconi is that it repudiated the Sub-Contract when it purported to terminate that contract on 10 December 1996 and that BHP-IT, having accepted that repudiation on 21 January 1997, suffered loss and damage in consequence: "the Repudiation Claim". A subsidiary claim made is that GEC Marconi's conduct fell within a provision of the Sub-Contract that entitled BHP-IT to an indemnity in respect of any liability it may have had to the Commonwealth under the Head Contract that resulted from the repudiation of the Sub-Contract: "the Indemnity Claim". 832 The claim against GEC Marconi Australia Pty Ltd was for an indemnity under a performance guarantee given by GEC Marconi Australia for costs and expenses incurred by reason of its failure to cause to be completed GEC Marconi's undertakings under the Sub-Contract: "the Performance Guarantee".
(a) The Factual Setting 835 I have previously set out in detail both the circumstances leading to GEC Marconi's entry into the Emulation Variation Agreement with BHP-IT on 1 November 1995 and the evidence concerning the alleged achievement of Milestone 4000. Here I will only make passing reference to aspects of that evidence. 836 Virtually from the inception of the Sub-Contract, GEC Marconi experienced difficulties in reaching the stipulated milestones (2000 and 3000) and in advancing software development. By early 1995 it had become apparent that the estimates of cost GEC Marconi had made for Code and Unit Test activities ("CUT") were insufficient to meet the process commitments required by the SDP. The "blow out" in the CUT phase progressively lengthened anticipated delays and progressively eroded GEC Marconi's margin for the project. 837 On 29 September Mr Wishart initiated a process of reassessing CUT effort estimates. By early October he was reporting that "current estimates" to complete the Sub-Contract "show an increase of around 1640 person days". 838 A facsimile of Lindsay Pears to Roger Cooke of 18 October 1995 reported that "the projected loss on ADCNET is causing a lot of heartache for EASAMS Division, GMS Directors, and the UK". Pears directed Roger Cooke (inter alia) to "[a]ccelerate the hire or contracting of a Project Manager" while retaining the services of Peter Wishart in a technical capacity and to complete the estimation process "using a sound estimating methodology, independent internal and external consultants … to validate estimates, and prepare a contract review by 27Oct1995". The facsimile concluded: ". I want to know why the sudden announcement of increase in costs of this magnitude, and an understanding of lessons learnt by the team (I suspect I already know what they will be). . What assurance will I have that we do not end up with a $2M loss? The bottom line is that the company is not prepared to carry a potential loss of $1M or greater. There will be no place for adversarial views about the … input from independent reviewers. Please discuss as soon as possible. Since the stakes are so high, we expect a prompt response from the Canberra team and strong sense of commitment to control the damage and reverse the situation where practical. As recently discussed, there are no soft landings with this overrun, but you will receive the support required to resolve this problem. Let me know what help or support you need." 839 The Emulation Variation Agreement was entered into on 1 November 1995. Shortly afterwards, Mr Pears was replaced by Mr Sharp as General Manager. 840 A Project Overview report of 9 November 1995 showed (inter alia) that "the Contract had deteriorated by $1164K and now shows a loss of $657K" and that project completion was to be extended from July 1996 to November 1996. The principal cause of these results was the underestimation of the CUTS phase. 841 On 27 November 1995, Mr Sharp had a meeting with Mr Brent. Brent recorded the matters discussed in a letter to Mr Sharp of 5 December. Though I have referred to this letter earlier in these reasons, I need to restate part of it: ". EASAMS schedule - you indicated that EASAMS was moving it's ADCNET project control mechanisms to a more rigorous project control regime. We agreed that EASAMS will provide a month-end schedule of the ADCNET project each month to BHP IT beginning with the month of November, 1995; . EASAMS estimate to complete - you indicated that EASAMS propose to have an independent estimator conduct a full re-estimate of the work remaining. These estimates will be calibrated against work completed to determine the accuracy of the estimate; … . STUBS - you indicated that EASAMS would produce a formal priced proposal for the replacement of STUBS by 22 January, 1996. In this context we discussed options for ensuring smooth passage to the proposal. We agreed that full visibility of the following elements of the proposal would be made available to DFAT: - full rationale supporting the estimates including levels of effort, impact on CSC's, development status of CSC's etc, etc; - full description of identified risks. I found the meeting to be productive and propose that we continue to meet on a regular basis - I suggest once a month - to review the position on the ADCNET program." 842 To move ahead somewhat, according to Roger Cooke, the independent estimation foreshadowed in the letter was completed during December 1995 or possibly January 1996. That re-estimation concluded that there was a schedule slip of 12-18 months and a cost deterioration in the order of $4.335 million. 843 I would note in passing that across December 1995-January 1996 preparations were in train for, and comments were being made on draft documents for, TRR which was scheduled for January and then rescheduled to occur in February 1996. I would equally note that the STUBS emulator was demonstrated and then paid for in the first half of February 1996. 844 Following a transitional period in late January 1996, Mr Goldsmith replaced Peter Wishart as GEC Marconi's Project Manager. 845 Some time in February 1996 Mr Sharp had prepared an "ADCNET Project Overview" for the English parent company. Its Executive Summary referred (inter alia) to the schedule slip and cost deterioration noted above and continued: "In an attempt to mitigate the forecast cost and schedule exposure, EASAMS is negotiating with BHP-IT and DFAT a proposed amendment to the Contract, whereby the Contract is essentially terminated at this time and a time and material rate set for a 3-4 month period to allow an agreed and new technical baseline to be established. After this period EASAMS would then consider a new fixed price contract which recognised the understood technical scope, risk and schedule constraints at that time. Given the current state of negotiations a best case scenario for the contract would be a break-even and a worst case a loss of $4317K with the potential under a delay claim to negotiate a settlement to break-even or a small margin. The business is looking to provide a firmer view by the 12th April for inclusion in year end accounts." 846 In mid-February a series of communications passed between Mr Wishart and then Mr Goldsmith on the one hand and (ultimately) Les Cook on the other concerning proposed amendments to the FRS for the purposes of CR3057 and the STUBS replacement. On 19 February Mr Goldsmith wrote to Mr Brent indicating that GEC Marconi's analysis of DFAT's comments on the draft FRS changes, "has shown that DFAT has introduced a significant new requirement at FRS 4.1.4 which may have a major impact upon the design architecture": emphasis in original. It said this requirement "effectively alter[ed] the scope of the CR scoping task" and that the agreed timetable for completing the CR3057 scoping could not be adhered to. 847 On 20 February 1996 Les Cook wrote to Mr Brent responding to GEC Marconi's assertion that DFAT had introduced a new requirement into the FRS. He disputed that assertion; he noted that he raised the need for this change in paragraphs 8 and 9 of his minute "STUBS Replacement - Design Principles" of 8 November 1995 (which was an attachment to CR3057); but to avoid further delay he requested that that proposed change to the FRS be deleted. 848 On 19 February 1996 Mr Goldsmith sent a facsimile to Mr Sharp (which was copied to Roger Cooke) that was headed "Recent Developments ADCNET". It was as follows: "There have been a couple of developments which impact our strategy since Friday. STUBS Change Request - Late Friday, discovered a significant change to requirements as a result of comments from DFAT. This impacts the scope of the CR by 10% to 30% over previous estimates. In addition, it also adds further to the uncertainty. Kyrill is pushing real hard for our formal input by tomorrow. He expects a fully costed proposal with a new schedule. TRR - After discussions with Kyrill and DFAT on Friday, I had our team front up this morning for the TRR we had scheduled. I made statement that our Contract, being the superior document in the case of conflict, called for a TRR consisting only of review of 3 documents. That whilst we were late with the TRR according to the original schedule, we had done our best and had given proper notice of the TRR to be held today. Made the point that until Contract amended to resolve conflict with SDP and to split document reviews from TRR, the Contract and the Milestone payment had to be observed for formal contractual purposes. Then having made contractual point, stated that we would co-operate in defining what docs should be reviewed and when so as to fit in with our schedule whilst easing DFAT's task. … I hope that this has preserved our position with respect to being in a position to claim the milestone payment. ACTION I don't know how much longer I can keep the lid on this volcano! I recommend that we blow the whistle rather than any of the other players … it should strengthen our position at BHP IT's expense. I suggest we should advise Kyrill today that the comments on STUBBS received from DFAT have a significant impact which is yet to be assessed. This could bye us a couple of days. We can provoke a showdown via STUBBS if and when you wish by simply going back to Kyrill with a ROM price of say $2.5M and a schedule impact of say 9 months above our latest estimates. This however offers to put the initiative back to BHPIT who could blow the whistle. I still think that it is to our advantage to take that action once it is cleared. I think it would put us in a better light with senior management of DFAT and make BHPIT look worse. With the election looming, the DFAT senior management cannot be feeling too complacent." Emphasis added. 849 It was Roger Cooke's evidence that he thought that "this volcano" was a reference to the price of CR3057. Mr Sharp could not recall seeing the facsimile at the time. Mr Goldsmith did not give evidence. 850 On 22 February 1996 Mr Goldsmith provided Mr Sharp with briefing information for the meeting to be held the next day with BHP-IT. Mr Goldsmith indicated that the then proposed "minimum selling price" for CR3057 was $3,665,171. In arriving at this figure a "200% factor" was applied to the CSU Test Estimates "as a result of a sanity check after the fashion requested by Samy". I will refer below to the escalation of the estimates for CR3057. "Samy" appears to have been a GEC Marconi software engineer. The briefing information concluded with the observation: "BHPIT and DFAT have to be made to realise that the current contract was not ever practical it did not have a sound base. This is not earth shattering. Such mistakes do happen and at least it has been recognised fairly early. The problem needs to be addressed professionally and maturely." 851 It was at the 23 February meeting that Mr Sharp first indicated to Mr Brent (i) that the non-provision of STUBS might constitute a default under the Sub-Contract; and (ii) that GEC Marconi was proposing renegotiation of the basis of the Sub-Contract. This meeting, according to Mr Sharp, constituted the "negotiations with BHP-IT" referred to in his overview paper to the British parent company. 852 Sometime after this meeting but before the end of February, Mr Goldsmith was requested by Mr Sharp to search for documents concerning the STUBS emulation agreement. He found Mr Wishart's 16 October 1995 memorandum to Mr Breden and his 22 November 1995 response to Mr Cook's comments on the API Specifications for the STUBS emulator (on these documents, see Part II: The Emulation Variation Agreement, (a) Additional Factual Material). These communications both envisaged the use of emulation for acceptance testing. In drawing these to Mr Sharp's attention in a facsimile of 1 March 1996, he went on to express the view: "Basically I don't think you have a viable case to say that the system wont work if it is tested against the emulator. I also don't think that you can make much of a case that DFAT can't use the system without STUBS. It is their risk." 853 Mr Goldsmith again communicated with Mr Sharp by facsimile on 4 March 1996 concerning the FRS. The opening paragraph was as follows: "The original RFT has many references to the need for gateways to other networks. However, the contract has the usual 'this agreement supercedes all previous …' clause. The FRS also has many references to the same requirement and to it being effected by STUBS. Tim can provide a list of FRS Para references. Thus you have good grounds to make your point regarding the thrust of the contract." Emphasis added. After indicating that he assumed "one of the players in this affaire will get hurt" and that "on the theory of the sacrificial lamb [GEC Marconi] might be advised to side with DFAT", Mr Goldsmith went on to set out a lengthy list of key issues demonstrating (amongst other things) that the contract was unworkable and required significant change and that a T and M contract was to be preferred as "DFAT takes all the risk". He concluded: "4. If DFAT/BHPIT still refuse to accept that there is a severe problem then we can raise a heap of questions on the FRS and link delay claims to each one basically claiming 100% delay for each item. 5. You should be aware that testing of Build 2 has yet to commence. There appears to be a non trivial incompatibility between what the developers produced and what the testers expected. I have discussed organisational and process changes which would mitigate against this occurring again. However, I have yet to commence instigating radical change. Basically, I'm adopting a business as usual approach but I guess that will only remain viable for a matter of days. After which we will be exposed if BHP IT blow the whistle first." 854 On 8 March 1996 Mr Goldsmith wrote to Mr Brent concerning CR3057. It said in part: "Because of the very high risks identified in the [accompanying] risk analysis, EASAMS is not prepared to offer a price for this CR in isolation. As previously discussed, EASAMS will wish to offer a price recognising Customer induced delays and frustrations of the Contract suffered by EASAMS to date." 855 The invoice for Milestone 4000 was issued on 12 March 1996. As I earlier indicated, Mr Sharp had no belief at the time that all of the money was due and he accepted that the issuing of the invoice was a ploy to increase commercial pressure on BHP-IT and the Commonwealth. Mr Goldsmith, who forwarded the invoice to BHP-IT, was later to write to Mr Breden (8 May 1996): "1. The main reason I suggested the invoice was to provide a vehicle for payment in the case BHP IT/DFAT did want to take up our original offer to determine the contract and move to a T&M phase. That payment would have brought us out about square and would have provided an easier mechanism than having to negotiate a termination settlement. 2. Nonetheless, there is some logic in the assertion that as the Contract takes precedence, the TRR as loosely defined in the contract was met by the documentation reviews and is applicable over the tighter definition in the SDP which does not appear to be a formal deliverable itself and therefore has less standing." 856 On the same day in a report prepared for Mr Sharp for transmission to the British parent company, it was stated under the heading "Opportunities": "The cancellation of the STUBS device and the central importance of STUBS to the "raison d'etre" of ADCNET provides the opportunity to renegotiate the contract. Rectification of Contract input documents eg the FRS and adoption of realistic schedules will reduce risk to acceptable levels (we are effectively sole source) and more equitable Terms and Conditions. High risk elements of the project will be moved outside the fixed price activities. The project duration and price will be significantly increased." Emphasis added. 857 Again on 12 March Mr Sharp sent Mr Brent GEC Marconi's proposals in relation to the non-provision of STUBS and DFAT's replacement strategy. The proposal document rehearsed GEC Marconi's arguments that were to loom large across the ensuing months. I refer to two matters in particular. These were: "d. The Customer can not unilaterally remove from the Contract the requirement of the Customer to provide STUBS CSI. e. The Customer's view that "STUBS Emulation" as developed by EASAMS under CR3049, is sufficient to allow completion and deployment of ADCNET is not accepted by EASAMS. STUBS Emulation was intended to be used to enable Code and Unit Testing and Integration to proceed until the STUBS replacement strategy was completed. The enclosed two engineering papers raised internally by EASAMS engineers outlining the shortfall in proceeding the Contract to conclusion with STUBS Emulation (Ref 10) support this view from an engineering perspective." The alternative ways forward remained termination or renegotiation on payment of Milestone 4000. 858 I have already referred to the "minimum selling price" of CR3057 on 22 February as being $3,665,171. By 27 March that price had increased to $5,229,803. Each of the two calculations was made by reference to spreadsheets that set out base figures referring to days for particular activities to which, in both instances, were applied additional percentage increases reflecting (i) an "80% confidence level for the estimate" and (ii) the "200% Samy sanity check". I would note in passing that BHP-IT has made much of the additional percentages and the compounding effect of their use in both spreadsheets. 859 On either 27 or 28 March a review meeting for the CR3057 costings was held. It was attended by Mr Sharp, Mr Becker and "Samy". I would note in passing that the evidence of Samy's role both in this meeting and in relation to the evolution of the CR3057 estimates is quite unsatisfactory. While I accept that at some period prior to the February estimates Samy suggested a "200% sanity check" in relation to the base figures then being used, I do not consider it safe to rely upon any of the evidence given by Mr Becker or Mr Sharp concerning Samy's involvement in this matter. 860 At the review meeting, a further uplift factor of 20% was applied to the cost price. Mr Becker said this was necessary because there were still "a number of unknowns in regard to KIV-7". Additionally he and Mr Sharp agreed to add a further million dollars - an "off-the-top-of-the-head" figure according to Mr Sharp - to produce a rough order of magnitude figure of $8 million. Mr Sharp acknowledged that figure was a "rough order of magnitude guess", estimates coming in various guises. 861 On 28 March 1996 GEC Marconi sent its CR3057 proposal to BHP-IT. It did not offer a firm price. Rather it merely advanced its rough order of magnitude figure of $8 million to complete the contract. It indicated that it regarded the non-provision of STUBS and the proposed use of KIV-7 as involving an attempt to pass significant and additional risk to GEC Marconi. It also noted that the clarity and integrity of the FRS was questionable. It proposed that the contract be terminated at Milestone 4000 and that a Critical Design Review then be held to achieve a new baseline. 862 Mr Brent indicated to Mr Haddad on 28 March that the GEC Marconi proposal was unacceptable to either BHP-IT or the Commonwealth. On 1 April in further commenting to Mr Haddad on the proposal he indicated: "The indicative value of $8 million is 150% of their contract and is grossly exaggerated in my view. I do accept that significant rework is required associated with STUBS replacement but not of that order of magnitude. I can find no rational basis for the estimate." 863 At a tri-partite meeting held on 2 April to discuss GEC Marconi's proposal, the Commonwealth indicated (according to Mr Skinner's email of the same day) that the proposal appeared unacceptable but would formally respond when it received GEC Marconi's formal offer. It did indicate, though, that if it did not proceed with CR3057 DFAT would complete the contract "as it was currently written" using the emulator and then replacing the emulation software at a later date. 864 On 2 April GEC Marconi sent two "lawyers letters" to BHP-IT formally stating its position on a number of matters. On 3 April the first Notice of Breach was served. On 11 April BHP-IT in turn served a Notice of Breach on the Commonwealth. BHP-IT responded to GEC Marconi's Notice on 17 April. 865 As earlier indicated, in his 12 March proposal document to BHP-IT Mr Sharp referred to technical difficulties in the way of using the emulator for acceptance testing. It seems that around this time he had requested two members of GEC Marconi's project team - Mr Harris and Mr Varatharajan - to identify deficiencies in the emulator built by GEC Marconi. In the event, a document which came to be entitled "Summary Review of STUBS Alternatives" was produced in final form around 30 May 1996, after going through at least one (and probably two) previous iterations. A 14 May version is also in evidence. I do not intend to outline the contents of these documents other than to note that both the 14 May and the 30 May documents contain an explicit reference to waiver of FRS requirements. The 14 May version was in terms that: "It has been verbally stated by the Department that they will waiver any requirements that cannot be tested using the emulator. Until we see the requirements that will be waived we cannot make a reasonable judgement." The 30 May version was in substantially similar terms. I would emphasise the 14 May version as it predated a meeting of 20 May with BHP-IT and DFAT to which reference is made below. 866 Both Mr Harris and Mr Varatharajan accepted that there was no technical reason why the ADCNET contract could not be completed using the emulator provided the documentary requirements that were obstacles to completion were either changed or waived. 867 On 17 May, Mr Vile of BHP-IT had a telephone conversation with Les Cook following a talk he had had with GEC Marconi management. Mr Cook's note of that conversation, though of some length, warrants quotation in almost its entirety. It reads: "2. Mr Vile stated that he had talked further with EASAMS management. EASAMS were no longer planning to provide a document claiming that, with only STUBS emulation, the developed software would be unusable and that the Functional Requirements Specification was unbuildable. EASAMS had agreed that the issues were now only 'money and principle'. 3. Mr Vile considered that the 'principle' was that DFAT had failed to provide STUBS and that this had or would in some way cause harm to EASAMS. 4. Mr Vile asked whether DFAT had decided that it will use the developed software, with STUBS emulation, together with the existing IBM system when deploying release 3. 5. Mr Cook stated that there would be a two stage cutover. The first stage would be as has always been intended, including both ADCNET and the IBM system running in parallel. Communications lines to posts, regional offices, other agencies will be transferred progressively to the ADCNET message switch and the 800 or so ADCNET users in DFAT Canberra will be progressively transferred from Release 1 systems to the Release 3 Canberra node. At the end of the first stage, the role of the IBM will have been reduced to providing connection to the few external communication lines to non-secure systems and to X400 and NNS networks. The second stage would be to replace the IBM with an implementation of sealing and gateways, replacing STUBS emulation. DFAT will decide when and how to achieve this, but it will not be in the scope of the current contract. 6. Mr Vile asked whether DFAT is prepared to state formally that this is its intended plan. Mr Cook said that DFAT would probably agree to this, subject to legal advice. 7. Mr Vile proposed that a meeting be sought with EASAMS management to attempt to resolve any outstanding technical issues. Mr Cook replied that DFAT would probably agree to such a meeting." 868 The proposed meeting occurred on 20 May. The two principal discussion items for the meeting were, according to its agenda (i) DFAT's strategy for deployment of ADCNET without STUBS and (ii) GEC Marconi's problems in interpreting the FRS. Les Cook did not keep notes of the meeting but he used three overheads to illustrate DFAT's deployment strategy. 869 Mr Sharp gave evidence that at this meeting Les Cook said something along the lines that he was prepared to discuss the potential waiver of FRS requirements. Mr Brent's evidence was that "waivers" were referred to at the meeting. 870 On 21 May 1996 a GEC Marconi engineer, Ian Otto, prepared a memorandum concerning the STUBS emulator. That memorandum, apparently unlike the "Summary Review" paper, was prepared with knowledge of Les Cook's 13 November 1995 and Mr Wishart's 22 November 1995 exchange concerning the emulator. I would note in passing that Mr Varatharajan conceded in cross-examination that he had never been shown Mr Wishart's letter of 22 November while Mr Harris said he believed he would have seen it some time in 1996. The conclusion arrived at by Mr Otto was that: "The STUBS emulator as specified is an incomplete solution to the problem of emulating the STUBS device and does not allow us to test all code paths without either changing our software (which defeats the purpose of the emulator) or making substantial modifications to the emulator." Mr Sharp gave evidence that he saw this memorandum about the time it was prepared. For completeness I would add Mr Otto prepared a further memorandum on 15 July 1996 giving "a software engineer's view" of the ADCNET project. In it he made the observation: "5. The Impact of STUBS Non-delivery of the STUBS device and use of the STUBS emulator does have an impact on the project. It will cause us to rework a number of documents and make a number of code changes. Compared to the other problems on the project however, it is fairly minor." Again Mr Sharp acknowledged he had seen this memorandum around the time it was prepared. Mr Otto did not give evidence in this proceeding. 871 On 22 May 1996 the Commonwealth formally indicated to BHP-IT that it did not consider the CR3057 proposal to be acceptable and it would not approve it. 872 On 28 May 1996 Mr Brent wrote to Les Cook seeking his advice on, amongst other things, what DFAT intended to do about obligations defined in the contract and the subsidiary documentation which still depended on the delivery of STUBS. Mr Skinner of DFAT replied on 30 May proposing a list of document changes "to remove any ambiguity arising from the use of STUBS emulation". I would note, as it has been relied upon by GEC Marconi , that the letter contained the following sentence: "DFAT requires BHP IT to deliver software in accordance with the existing contract, including the use of the STUBS emulation software to perform the functions which were to have been performed by STUBS equipment and software." BHP-IT forwarded this letter to GEC Marconi on 3 June. 873 On 18 June GEC Marconi responded to Mr Skinner's proposed document changes. It regarded these as a proposal to vary the contract and it rejected this, though indicating that it was "prepared to use reasonable endeavours to reach agreement". It then set out at length its reasons for rejecting the proposal which it said would by now be "well-known to you having regard to the range and depth of correspondence passing between us on the failure of BHP IT to supply STUBS as CSI". Attached to the response was a copy of the "Summary Review of STUBS Alternatives". On the same day the second Notice of Breach was served on BHP-IT. 874 The response and the attachment were forwarded to DFAT on 25 June 1996. DFAT responded by letter to BHP-IT of 18 July rejecting the arguments advanced in the "Summary Review" paper which it described as "irrelevant, invalid or both". It provided by way of attachment an eight-page commentary on the paper and its alleged errors. There is a dispute between the parties as to whether DFAT's 18 July comments on the "Summary Review" paper was ever forwarded to GEC Marconi. 875 BHP-IT provided its own response on 22 July 1996. It reasserted it had no contractual obligation to provide STUBS and that GEC Marconi was obliged to use the emulator for acceptance testing. It went on to observe: "Candidly we regard the allegations concerning STUBS as a diversionary tactic. You have stated that GEC's real concern is that it has lost money on Phase 2 work and that you believe this will continue when the project progresses. We confirm that we expect GEC to meet its contractual obligations and we have taken extensive legal advice to the effect that this is a reasonable expectation." 876 The final document to which I need refer is a report in September 1996, from GEC Marconi to its British parent. It contained the following: "The current instruction/position of BHP-IT and supported by DFAT is: (a) GMS Pty to complete development of software as contracted and where necessary BHP-IT/DFAT will provide waivers for testing aspects associated with STUBS." Emphasis added. 877 The only additional factual material to which I need refer - contained primarily in oral and written evidence of witnesses - relates (a) to whether Mr Sharp received Les Cook's 18 July comments on the "Summary Review" paper; and (b) to the issue of waivers of FRS requirements. 878 First, Les Cook's 18 July comments. Mr Brent, who was the addressee of the Skinner letter enclosing the comments, had no recollection of passing the document on to GEC Marconi. Mr Sharp's original oral evidence was that he received and read the comments and that he believed he asked Mr Harris and Mr Varatharajan to review their original report in light of Mr Cook's response. He later indicated he could not recall forwarding the comments to them or receiving a response. During a luncheon adjournment in re-examination he was asked by GEC Marconi's legal representatives to read the comments document and to consider when and in what circumstances he first read it. His evidence is that in so doing he realised he was mistaken and that he had not seen the document but rather the document he had in mind was the attachment to Ms Beattie's letter of 3 June (which was Mr Skinner's letter of 30 May which outlined the documentation changes proposed by DFAT). On the resumption of his re-examination he was again asked about the comments document and he said he believed it was a document that came under cover of a letter from Ms Beattie. 879 Mr Sharp later prepared a witness statement concerning the above. He was permitted to be recalled and gave further like evidence concerning the comments. For reasons I give below, I do not intend to outline his further evidence in any detail other than to note two matters: (i) He acknowledged that he had read the Skinner 30 May letter many times in 1996 and "up until now"; and (ii) In relation to the comments paper, he accepted he may have seen it but could not now remember. 880 Secondly, the evidence on waiver of FRS requirements. By way of background to this I simply note (a) the references to waiver in the 14 and 30 May versions of the "Summary Review" paper and (b) the September 1996 GEC Marconi document that indicated that "BHP-IT/DFAT will provide waivers for testing aspects associated with STUBS". 881 Les Cook's evidence is that he would not have taken the decision to waive FRS requirements on his own. He would have made a recommendation to the Department. But he had no recollection of discussing possible waivers in 1996. I would note in passing that the 30 May 1996 DFAT letter on documentation changes was signed for DFAT by Mr Skinner. In cross-examination by Mr Simpkins SC, Les Cook gave the following answers: "Q. And you never sought, did you, to engage in a process of identification of appropriate amendments [of the FRS] with BHP-IT or GEC; isn't that right? A. I think my original 1996 response to the [Summary Review] paper made it clear that the emulation should have been sufficient to do acceptance testing. Had I been asked for waivers, as were later agreed, I believe I would have agreed to them. Q. I just want to ask you about the position you adopted in 1996. Your position in 1996 was that you were personally not prepared to entertain amendments or waivers because of the view you held that the emulator, as constructed, ought properly be sufficient to take this project to acceptance testing completion? A. I thought no waivers were essential." I would note, additionally, that when he prepared his witness statement for this proceeding Mr Cook had no recollection of producing the 18 July comments paper and in fact he prepared a paper in 2000 in reply to the Summary Review paper. 882 Mr Brent's evidence was that at the 20 May meeting Les Cook referred to waiver of FRS requirements for acceptance testing using the emulator. That evidence was more unequivocal as to timing than was his witness statement which referred to the 20 May meeting "or at another discussion … about this time". He equally gave evidence that the concept of waiving was mentioned in other forums and was "an established precedent on the project" but he could not recall any discussions about waiving requirements for acceptance testing prior to 20 May 1996. 883 As to his 28 May 1996 letter and its request of Mr Cook concerning what was intended to be done about obligations in the contract and subsidiary documents that depended on the delivery of STUBS, Mr Brent said that the sentence in question did not necessarily address the waiving issue and probably addressed contractual issues. I would interpolate I regard this and related evidence on this letter as involving no more than reconstruction on Mr Brent's part as he acknowledged. 884 Mr Harris' initial evidence was that he did not know by May 1996 that Les Cook had made clear that DFAT was prepared to waive or amend any requirements that could not be tested with the emulator. He was aware that Les Cook knew he had the option of change requests and waivers open to him but not that the Commonwealth intended "to do such a thing". At the end of his cross-examination he accepted that Les Cook verbally said to him that DFAT could waive FRS requirements. While he could not recall exactly what was said it would have been something along the lines of that "the Department would waive any requirement in the FRS that could not be tested using the emulator". 885 Mr Varatharajan's evidence on the matter is contained in the following exchanges: "Q. You knew that the position of the Department of Foreign Affairs & Trade was that either it was prepared to change requirements that could not be met by the emulator or, alternatively, that it would waive requirements that could not be met by the emulator, didn't you? A. That would have been the only way to proceed with the contract. But I did not know that DFAT made any proposal to do either. I know that there were a number of things in train at that time. There was nothing that was agreed, to my knowledge, at that time." He was then taken to the "waiver paragraph" of the "Summary Review" paper and he accepted he knew to be the case what was stated there. He went on, though, to indicate that it would be difficult to work out what requirements needed to be waived up front. He accepted that what needed to be waived would become apparent at systems integration. He also accepted that insofar as he knew, no one on GEC Marconi's side followed up with DFAT what was going to be waived. 886 Mr Sharp's evidence on waiver fell into several parts. The first related to the 20 May 1996 meeting. He accepted that Les Cook said something "along the lines that he was prepared to discuss the potential waivers" of requirements in the FRS that might be obstacles to completion using emulation. He refused to accept an unequivocal offer of waiver was made in "black and white terms". Secondly, in reference to the September GEC Marconi document referred to above, Mr Sharp accepted that he knew well before September 1996 that BHP-IT/DFAT had offered to provide waivers for testing aspects associated with STUBS emulation, if necessary, but that what were to be the matters waived had not been agreed. Thirdly, he said he believed on the basis of advice from the project team that it was not technically feasible to complete the contract using the emulator as-built, although he had accepted that he was not told this by Mr Goldsmith, Mr Otto, Mr Varatharajan or Mr Harris. Fifthly on the issue of agreed waivers, he accepted he did not once go back to DFAT to ask specifically what requirements it was prepared to change. He did suggest, though, that he followed up this matter with BHP-IT at meetings in the latter part of 1996. The following passages are emblematic of this part of his evidence in cross-examination by Mr Marks (which I do not set out in full for reasons I give below): "Q. And you followed up with them, did you, as to whether these offers were still open? A. I followed up with respect to aiming to have discussion with BHP and Foreign Affairs & Trade as to what could be achieved with respect to bringing the Contract forward. Q. With some future - sorry? A. Sorry, including what they aimed for us to do with respect to the use of the emulator to complete the Contract. Q. But what I am really putting to you is this: you didn't endeavour to ascertain what requirements might be the subject of or could be the subject of waivers for testing aspects associated with STUBS; did you? A. Not in simple terms. Q. No. And in that sense you never sought to progress the matter to try and find out what waivers for testing purposes associated with STUBS might be eventually provided? A. We were at a point in our understanding of the offer, as you call it, which was far more encompassing than some simple waivers. We had to further understand, and requested further meetings with Foreign Affairs through BHP, which were not forthcoming. … Q. Did you write to BHP asking BHP to clarify what requirements, if any, BHP or DFAT was prepared to waive for testing purposes associated with STUBS emulation? A. I did not. Q. Did anyone else, to the best of your knowledge, write such a letter? A. I cannot recall." He later gave evidence that he had advice from his "technical people" that "the waivers needed further clarification and understanding on our part to understand how we could proceed with the contract". 887 On the related question of acceptance testing with the emulator, Mr Becker's evidence is that there never was any plan to complete the contract using the emulation software because he understood from the technical people that it could not be done. Roger Cooke's evidence was that the emulator that was built could not be used for acceptance testing. As I have already noted both Mr Harris and Mr Varatharajan accepted that, with appropriate documentary changes, there was not technical reason why the Sub-Contract could not have been completed using the emulator.
(b) Applicable Principles 888 I need say little on the principles governing repudiation of a contract. They are not in issue between the parties. I would note the following. 889 (i) A party will have repudiated a contract if, by words or conduct, it evinces an intention no longer to be bound by it or if that party shows it intends to fulfil the contract only in a manner substantially inconsistent with its obligations and not in any other way: Shevill v Builders Licensing Board (1982) 149 CLR 620 at 625-626; Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623. 890 (ii) The party's conduct is to be judged objectively by reference to the effect it would be reasonably calculated to have upon a reasonable person: Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd, at 658; Satellite Estate Pty Ltd v Jaquet (1968) 71 SR(NSW) 126 at 150. 891 (iii) A party that acts on a genuine but erroneous view of its obligations under the contract will not for that reason alone have repudiated it. That party may still be willing to perform the contract according to its tenor; to recognise its heresy; or to accept an authoritative exposition of the contract: DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 at 431-432; Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277. But persistence in an untenable construction will ordinarily be regarded as repudiatory: Summers v The Commonwealth (1918) 25 CLR 144 at 152; and see Chitty on Contracts, vol 1, para 25-018 (28th ed).
(c) Submissions and Conclusions 892 I should indicate at the outset that I consider the present to be a clear instance of repudiation. In light of my previous findings, GEC Marconi had contractually agreed both to the non-provision of STUBS and to acceptance testing using the emulation software. Equally, its claim to have achieved Milestone 4000 was not only incorrect, it was colourable. GEC Marconi kept the Sub-Contract on foot with the objects in mind of securing either a favourable renegotiation or a termination for convenience. When these proved unachievable it staged its own termination. Its conduct was not that of one adhering genuinely to a mistaken interpretation of the contract. Rather it manipulated and knowingly misinterpreted contractual obligations and engaged in disingenuous conduct to avoid having to complete the then Sub-Contract which, from at least July 1996, it had no intention of doing. 893 The starting point of GEC Marconi's submissions is that it is not enough simply to show that it improperly terminated. If it is shown to have acted on a bona fide construction of the Sub-Contract, it must be asked whether the termination was nonetheless repudiatory. 894 Central to its submissions is the claim that it did nothing illegitimate in availing of the opportunity CR3057 offered to renegotiate the contract self-interestedly to avoid apprehended losses. For this reason it attacks both the concentration of BHP-IT and the Commonwealth on the "strategy" adopted in relation to CR3057 and the assertion that its CR3057 response was overpriced and an attempt either improperly to recoup losses or to escape the Sub-Contract. 895 Its submissions go on to point to what it alleges was the importance to the ADCNET project of replacing the IBM message switch. As I understand the burden of this part of the submissions, it relates to GEC Marconi's good faith in erroneously insisting upon the requirement that STUBS or a replacement be provided. It characterised BHP-IT's insistence on use of the emulator as involving the non-fulfilment of the most important commercial objective intended to be achieved by the ADCNET project. 896 Again inconsistently with my finding of an implied term in the Emulation Variation Agreement that the parties would amend all contractual documentation to enable emulation to be used for acceptance testing, it submitted that the contract would only be completed by agreed variations to, or waivers of, the FRS. It attacks both the manner in which "waivers" were said to have been offered and the lack of agreed waivers. 897 It relies upon the reasonableness of its own belief about technical difficulties in acceptance testing with the emulator to rebut the contention that it acted unreasonably in terminating. In this it invites me to find that GEC Marconi never received Les Cook's 18 July comments paper on the Summary Review and in so doing to accept Mr Sharp's retraction of his evidence that he had seen and read that paper. 898 Before expressing my own view on GEC Marconi's submissions, it is appropriate that I make reference to the witnesses who gave evidence on matters relevant to those submissions. First, I have derived little assistance from Les Cook's evidence. I am not satisfied that he has sufficient recollection of any of the matters in question as would make it safe to rely on his oral or written testimony. He had no recollection of actions that he did take (eg writing the 18 July comments) while he gave positive evidence on matters of which he had no recollection. Secondly, I again regard Mr Brent's evidence as unreliable because of the danger that it reflected no more than reconstruction, although I have accepted his evidence on the offer of waivers. Thirdly, I have serious reserve about Mr Sharp's evidence on most matters for reasons of credibility. He was often evasive. He was self-contradictory. And in significant respects his evidence was contrived. I consider it unlikely that he had any actual recollection of some of the matters on which he gave evidence. I regard this as accounting for the difficulty he got himself into in relation to Les Cook's 18 July comments paper. Fourthly, I am not prepared for reasons of credibility to rely upon Mr Becker's evidence particularly as it related to the pricing of CR3057. Finally, and importantly, I attribute obvious significance to the failure to call Mr Goldsmith. He was the author of important documents the precise signification of parts of which was not always apparent (eg the "volcano" facsimile). He was a significant actor in events from February to at least April 1996 and was capable of throwing light upon them. 899 Turning to my own conclusions, I consider that the events which occurred from early February 1996 onwards need to be viewed in light of the changes in GEC Marconi's management that immediately preceded them. Mr Wishart and Mr Pears had been replaced by Mr Goldsmith and Mr Sharp, neither of whom had had any involvement in CR3049 and the agreements and understandings engendered at that time. 900 It is not open to doubt that, faced with the prospect of a ballooning loss on the Sub-Contract, GEC Marconi management evolved a strategy in February 1996 to protect its own interests - a strategy which appears, moreover, to have been developed with little understanding of the commitments and representations made by GEC Marconi in November 1995 (and acted on thereafter) in consequence of the cancellation of STUBS. Its focus was securing the renegotiation of the Sub-Contract and the establishment of a new technical baseline. To induce such a renegotiation GEC Marconi needed to be in a position to be able to exert pressure on BHP-IT and DFAT. For this reason, I infer, GEC Marconi sought to exploit opportunities (available to it or manufactured by it) to create an environment favourable to its end. I am satisfied that for the purpose of giving itself the apparent capacity to terminate the contract it raised both the issue of the non-provision of STUBS and the non-payment of Milestone 4000 - although I do not consider that GEC Marconi's commercial objective or intention initially envisaged termination, notwithstanding this was one of the way forward options put in its 12 March proposal to BHP-IT. 901 Insofar as concerns the non-provision of STUBS, I do not consider that when this matter was first raised in February 1996, it was done so in the genuine and reasonable belief that the obligation to supply STUBS remained. Whatever might have been the understanding of individual members of the project team, I am satisfied that it was a contrivance sanctioned by Mr Sharp for his own strategic purposes. It is unsurprising that the February "negotiations" with BHP-IT he reported to his British parent company were no more than the meetings in late February in which the STUBS "announcement" was made to BHP-IT and the Commonwealth. 902 I equally am satisfied that Mr Sharp sought to provide apparent justifications for his stand on STUBS and he appears to have used Mr Goldsmith's services to provide such evidentiary support as could be garnered to this end - as witness Mr Goldsmith's facsimile of 1 March 1996 (on the search for documents relating to the partial emulation of STUBS) and of 4 March (on the "thrust of the contract"). I am not satisfied that the view taken by GEC Marconi as to the purpose of the STUBS emulation reflected a considered appraisal of its intended and agreed purpose. Rather it was an expedient one to be exploited in the circumstances whether or not it was correct. Nor am I satisfied that the importance Mr Sharp sought to attribute STUBS in the ADCNET project was inspired by a genuine belief that such was the case. GEC Marconi itself had offered in 1995 to complete the contract without STUBS. 903 By his own admission, Mr Sharp used the invoicing for Milestone 4000 as a ploy to increase commercial pressure on BHP-IT while not believing that all of the milestone money was due. 904 Steps which I consider were taken or contemplated for the purpose of inducing a renegotiation were (i) the refusal to put forward a firm price for CR3057 and the provision of a rough order of magnitude figure of $8 million to complete the contract; (ii) the advancing of technical arguments to demonstrate that the emulator could not be used to complete acceptance testing; and (iii) the accentuation of the deficiencies of the FRS as evidenced in Mr Goldsmith's 4 March facsimile foreshadowing the raising of "a heap of questions on the FRS" each linked to 100% delay claims, "if DFAT/BHP-IT still refuse to accept there is a severe problem". 905 The response to CR3057 was, I consider, clearly tactical. All that was offered was a renegotiation proposal and a rough order of magnitude figure to complete the contract in the way proposed. I accept that the introduction of KIV-7 into the ADCNET project via CR3057 would have involved a significant new risk and that GEC Marconi, if conscientiously preparing a costing, would have made provision for potential risks as best it could as a matter of professional judgment. I equally accept that GEC Marconi's previous estimating for the Sub-Contract provided a salutary warning to it. While I have no reason to conclude that the individuals who compiled the raw figures for the estimates were acting other than conscientiously in what they were doing, I am not satisfied that the process engaged in by Mr Sharp, Mr Becker and Samy on 27 March 1996 represented a bona fide attempt at estimation of cost to complete. The evidence of Mr Sharp and Mr Becker, which was on occasion inconsistent and which was unsupported by documentary proof, was quite unconvincing. It was made the more so by the roles they assigned in the matter to "Samy" (he was never graced with a surname). I consider that the sum arrived at was considerably and designedly inflated in GEC Marconi's favour for the purpose of later possible loss recoupment; that it was not expected that it would be accepted in principle - the first Notice of Breach was served within days of the CR3057 response being sent to BHP-IT; and that it was advanced in furtherance of the strategy of securing a contract renegotiation. I do not find it at all surprising that it was found to be unacceptable by BHP-IT and the Commonwealth. It is noteworthy that, at the 2 April 1996 meeting where GEC Marconi explained its proposal, the Commonwealth apparently indicated that if it did not proceed with CR3057 it would proceed with the contract "as written" accepting the software with the emulation and then replacing the emulation software at a later date. 906 The raising of technical objections to the use of the emulator for acceptance testing was, I consider, a tactical move by GEC Marconi aimed at accentuating the need for further agreement between the parties before the contract could be completed. But it was an unusual move. GEC Marconi had agreed to build an emulator for acceptance testing. Mr Wishart had twice confirmed this, most importantly for present purposes in his 22 November 1995 response to Les Cook's 13 November 1995 letter. Neither Mr Varatharajan, nor, probably, Mr Harris were aware of this response at the time they prepared their Summary Review on which GEC Marconi has placed considerable reliance. Both, though, considered that with appropriate waivers or amendments, the emulator could be used for acceptance testing. The Summary Review paper has been accorded a status in this proceeding that it does not warrant. Given what GEC Marconi contracted to, and represented it would, do with emulation in November 1995, the paper sits oddly to say the least both with the responsibility it then assumed and with its own action in building the emulator. Furthermore the paper acknowledged explicitly the offer of waiver of requirements that could not be tested using the emulator. 907 I am satisfied that Mr Sharp, having commissioned the development of the paper, was content to exploit its conclusions for his own purposes. I do not consider that he was relying upon the paper to justify some personal belief that there was a significant obstacle to the completion of the Sub-Contract. He was aware of Mr Otto's contrary view that with modifications the emulator as-built could be used for acceptance testing. And he was aware prior to the final version of the paper of 30 May 1996, that the Commonwealth was offering waivers - a subject to which I will return below. I likewise do not consider the question whether GEC Marconi received Les Cook's 18 July comments paper to be of particular moment. I am satisfied that by mid-July, if not considerably earlier, GEC Marconi had decided it would not complete the contract using the emulator and was acting accordingly. 908 I accept Mr Sharp's evidence that he could not recall whether or not he received the comments paper. However, I do not accept the reason he gave for mistakenly agreeing he had received it. This said, I am unprepared to find that the Cook paper was forwarded to GEC Marconi. Mr Brent had no recollection of passing it on. By mid-July, Ms Beattie and Mr Haddad were also communicating with GEC Marconi on BHP-IT's behalf. There was in this arrangement the prospect for oversight. The comments paper was not amongst the documents produced by GEC Marconi on discovery. In this state of affairs one can only speculate. 909 One additional matter in relation to emulation should be noted. In his 30 May 1996 letter Mr Skinner used a sentence which could be taken as suggesting that the emulation software was to perform the functions which were to have been performed by STUBS equipment and software. Considered against a background of the 26 September 1995 letter, CR3049 and the building of the emulator, I do not consider it would have been reasonable for GEC Marconi to have assumed from this alone that the long understood purpose of the emulator had been changed. If it had any doubt on this matter it could have sought clarification. Mr Sharp's attempt to exploit the sentence in question in his 18 June response to the 30 May letter was disingenuous. 910 With the formal rejection of the CR3057 proposal by the Commonwealth in late May an important outstanding matter was that of amendments to, and waivers of requirements in, the contractual documentation to permit acceptance testing with the emulator. Putting to one side what I have found to be the actual contractual obligation of the parties in relation to the documentation and focussing solely on their respective stances and actions, I consider it to be clear that, from the end of May onwards, GEC Marconi was seeking to avoid having matters clarified in a way which would facilitate acceptance testing using the emulator. 911 GEC Marconi's response of 18 June 1996 to the Skinner 30 May document-change letter was a rejection out of hand of what was proposed. Though the letter carried the comment that GEC Marconi was prepared to use reasonable endeavours to reach agreement (cf cl 11.3 of the Sub-Contract), the tenor of the letter was quite to the contrary. It is again unsurprising that the second Notice of Breach was served on the same day. In its submissions the Commonwealth has considered at length this letter and Mr Sharp's evidence in relation to it. I am in general agreement with those submissions. GEC Marconi was by then unwilling to cooperate to complete the existing Sub-Contract. 912 It revealed a like attitude in relation to waivers. I find on the basis of the documentary evidence that waivers to permit acceptance testing had been offered by the Commonwealth prior to at least 14 May 1996 and this was well understood by GEC Marconi and by Mr Sharp by at least the end of May 1996. I reject Mr Sharp's evidence that he subsequently followed up the subject of waivers with BHP-IT, though "not in simple terms". There is no documentation to support his assertion. I do not consider that that follow up occurred at all or that Mr Sharp wanted to agree waivers to permit completion of the Sub-Contract. 913 I should add in passing that I do not regard Mr Brent's 28 May letter to Mr Cook in which he sought advice on the STUBS dependent references in the contractual documentation as having any bearing on the question of whether waivers had been offered. That letter acknowledged that there was to be emulation, and addressed the inconsistent state of the documentation as a formal contractual matter. 914 GEC Marconi has submitted that the true impediment to acceptance of the System was not any perceived inadequacy in the emulator but the unwillingness on the part of DFAT and BHP-IT to vary the Contract and to agree waivers. I am satisfied that the contrary was the case. The fault lay with GEC Marconi. Its response to the 30 May letter was uncompromising. It did not seek to ascertain the requirements that DFAT would waive. The inference is irresistible that by mid-year it had no intention of performing the Sub-Contract. Its strategy had failed. When it purported to terminate the contract it merely confirmed what its conduct reasonably conveyed for quite some time. It had repudiated the Sub-Contract.
(d) Breach of the Implied Term ("Good Faith and Fair Dealing") 915 BHP-IT has pleaded that GEC Marconi breached an implied term of the Sub-Contract which required it to act honestly, fairly and reasonably in giving any notice under cl 40.8 and cl 40.9 (the termination provisions). As I understand it, this term applied to the exercise of the termination provisions what is now commonly referred to as the duty of good faith and fair dealing. The term itself is said in the circumstances to be implied both by law and ad hoc: on the difference see Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 256ff; Hughes Aircraft Systems International v Airservices Australia (1997) 76 FCR 151 at 190ff. 916 GEC Marconi resists the implication. To the extent that the implication was said to be one of law, it is contended that this is precluded by cl 50 of the Sub-Contract (an "entire agreement" clause): Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 at 490-493; Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 449-450. The entire agreement clause, it is said, either expressly excludes or is inconsistent with the good faith term to be implied by law. It is equally said that, as the parties had addressed issues of good faith in specific provisions it would be inconsistent with their stated intention to imply a further such obligation. To the extent that the implication is said to arise ad hoc, GEC Marconi accepts that the entire agreement clause will not, of itself, defeat such an implication: Etna v Arif [1999] 2 VR 353 at 371. Nonetheless it contends that the good faith implication is not necessary to give business efficacy to the contract. 917 Given my finding on repudiation, I do not intend dealing with these submissions at length. There are, though, several comments I would wish to make. 918 It has been said that "[i]t is very easy to criticise the use of implied terms to incorporate an obligation of good faith": Peden, "The Meaning of Contractual Good Faith" (2002) 22 Aust Bar Rev 235 at 245. There is some justice in this. The principles stated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283 that are to be applied in making an implication ad hoc are not particularly apt to identify what are the standards of conduct that the parties are reasonably entitled to expect of each other in the performance and enforcement of their contract. And if it be the case that terms implied by law had their origins in implications based on the intentions of the parties that thereafter became so much a part of the common understanding as to be imported into transactions of the type to which the particular implication relates: Byrne's case, above, at 449; this form of implication likewise provides a not altogether happy vehicle for justifying the modern good faith implication. 919 Part of our difficulty arises from the fact that, express or implied term apart, we have no other available common law device for imposing obligations on parties that are contractual in character. We do not have the facility, for example, to treat the duty as simply a mandatory rule of contract law as do many European legal systems: see Principles of European Contract Law, Art 1.201 and see n5; Principles of International Commercial Contract, Art 1.7; see also Uniform Commercial Code s1-102(3). 920 This in turn exposes another difficulty. There is not yet agreement in this country as to the province of good faith in contract law. Some, myself included: see Hughes Aircraft Systems International, above, at 192-193; consider that the duty of good faith and fair dealing should apply to all contracts. Others are prepared for the moment to see it as a legal incident of particular classes of contract: Alcatel Australia Ltd v Scarcella (1988) 44 NSWLR 349; Gary Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703; and see Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382. This uncertainty, in my view, reflects an uncertainty about the very purpose of the duty itself in regulating contractual behaviour. It also exposes a difficulty of a distinctly doctrinal character: Is the duty one that can be excluded by agreement? On one view, reflected in civilian legal systems and s1-102(3) of the Uniform Commercial Code, the very rationale of the duty in contract law precludes its exclusion. But as a matter of legal doctrine in this country it must be accepted that, as an implied term, it is capable of being excluded by express or by inconsistent provision - although it is, perhaps, difficult to envisage an express provision authorising dishonesty. We clearly have not reached the point where it can be said: "Although ... a covenant of good faith is implied in every contract, an action for its breach is really no different from a tort action, because the duty of good faith is imposed by law and is not a contractual term that the parties are free to bargain in or out as they see fit.": Carmichael v Adirondack Bottled Gas Corporation of Vermont 635 A2d 1211 at 1216 (1993). There are, nonetheless, real questions still to answer in Australian law as to the proper approach to be taken where the issue is, not whether a duty of good faith should be implied, but rather whether it should be excluded in circumstances where it would otherwise be implied but for some alleged inconsistency with, or preclusion by, the terms of the contract: see Farnsworth, "Good Faith in Contract", [6], in (2002) AMPLA Yearbook, (forthcoming). 921 I have mentioned the above because of the way GEC Marconi has framed its defence to BHP-IT's claim. While I refrain from expressing a concluded view on the matter, I consider this to be a case in which cogent grounds exist for making the implication sought. I would simply note that the Sub-Contract was a long term relational one in which cooperation and trust were to be expected because of the back-to-back nature of the ADCNET contracts. And it was one in which BHP-IT was in a position of vulnerability vis ŕ vis GEC Marconi given its parallel obligations under the Head Contract. 922 The final comments I would make are to indicate that (i) I consider the law in this country to be that an "entire agreement" clause does not preclude implications ad hoc: see Etna v Arif, above; so that I cannot, with respect, agree with the view to the contrary expressed in NT Power Generation Pty Ltd v Power and Water Authority (2001) 184 ALR 481 at [387]; and (ii) I find arresting the suggestion that an entire agreement clause is of itself sufficient to constitute an "express exclusion" of an implied duty of good faith and fair dealing where that implication would otherwise have been made by law.
(a) A Brief Chronology 924 (1) The respective contract prices of the ADCNET Head Contract and Sub-Contract were $9,609,569 and $6,218,260. These were payable by instalments on the achievement of seven milestones. By the time BHP-IT accepted GEC Marconi's repudiation of the Sub-Contract, Milestone 3000 had been achieved and milestone payments of $5,575,000 and $3,875,000 had been received by BHP-IT from the Commonwealth and by GEC Marconi from BHP-IT respectively. 925 (2) In the period from the execution of the two contracts in September 1994 until GEC Marconi's purported termination of the contract, BHP-IT had incurred project management expenses that were referable to both contracts. 926 (3) On 29 January 1997 BHP-IT called on the financial securities provided by GEC Marconi and, by so doing, received a sum equivalent to that received by GEC Marconi by way of milestone payments (ie $3,875,000). 927 (4) Though GEC Marconi's repudiation resulted in BHP-IT's being further in breach of the Head Contract, the Commonwealth did not terminate the Head Contract for breach. BHP-IT itself assumed the responsibility actually to perform the software development and integration formally required by the Head Contract but which, in fact, was previously being performed by GEC Marconi for BHP-IT under the Sub-Contract. This was a significant change of role for BHP-IT in the Head Contract from that envisaged when both contracts were entered into in 1994. 928 (5) The process that led to BHP-IT committing itself to this performance involved protracted discussions between the parties in 1997 that resulted in (a) a review of, and significant amendments to, the FRS; (b) changes to the CIS and, in this, a greater use of off-the-shelf-products; and (c) the execution of the Variation Agreement. A new project team was to be assembled by BHP-IT for the purpose. 929 (6) Under the Variation Agreement (which took effect as an amendment to the Head Contract) BHP-IT agreed to perform the amended Head Contract for the previously agreed contract price but according to a new schedule. In performing the contract BHP-IT and Commonwealth agreed that BHP-IT would "start from scratch", making no use of any materials previously provided by GEC Marconi. As a new regime of milestones was specified in the amended contract, BHP-IT refunded the Milestone payments 2000 and 3000 it had received under the original contract. It nonetheless retained a sum equivalent to the original Milestone 1000 as a "mobilisation payment" under the amended contract. 930 (7) In 1998 the Head Contract was further amended to develop the Expedited Release 3 ("ER3") software which would provide a message switching facility and would enable an earlier decommissioning of the IBM system than was envisaged under the Head Contract. This work was separately costed and charged for. 931 (8) Work on the amended Head Contract was suspended by agreement in September 2000. By that time BHP-IT had been paid $7,109,769 in the form of Milestone payments and had incurred performance costs of $5,136,122. BHP-IT's earned value calculation was that 55% of the work under the Head Contract had been completed. BHP-IT in consequence returned $503,803 to the Commonwealth and retained $6,605,966 (being 55% of the Milestones payable). As I indicate below, the suspension reflected the abandonment of the ADCNET project, for practical purposes. 932 It needs to be emphasised that BHP-IT's damages claim is for breach of the Sub-Contract. The reason for this emphasis is because quite significant effects of that breach flowed into the Head Contract and are reflected in particular heads of damages claimed.
(b) Applicable Principles 933 There is no real dispute between the parties as to the principles governing the proper measure of contractual damages. Such controversy as there is relates to the application of those principles and the methodology used in quantification of the damages claimed. Those principles I would state for present purposes, as follows. 934 (1) The general principle governing the measure of damages for breach of contract is that where a party sustains a loss by reason of such a breach that party is, so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed: Robinson v Harman (1848) 1 Ex 850 at 855; Wenham v Ella (1972) 127 CLR 454 at 471; The Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64. 935 (2) The usual rule is that damages for breach of contract are assessed as at the date of the breach: Amann Aviation, above, at 161-162; Cheshire and Fifoot, Law of Contract, para 23.24 (8th Aust ed). "[T]his rule is not universal": Johnson v Perez (1988) 166 CLR 351 at 355; and if following it would give rise to injustice, the court may fix such other date as is appropriate in the circumstances to give the innocent party the amount in damages which will most fairly compensate that party for the wrong suffered: Johnson v Agnew [1980] AC 367 at 400-401; Johnson v Perez, above, at 355-356. A common example of another date being fixed is where, after one party fails to provide goods or services, the other party thereafter seeks or proposes to seek substitute performance and claims damages for the cost of so doing: eg: Radford v De Froberville [1977] 1 WLR 1262; Cormier Enterprises Ltd v Costello (1980) 108 DLR (3d) 472; Conquest v Ebbetts [1896] AC 490; Chitty on Contracts, vol 1, paras 27-014, 27-052 (28th ed). 936 (3) If a contract was a profitable one (proof of the likelihood of which rests on the innocent party: Amann Aviation, at 80), but was terminated for breach or repudiation, the profits lost and the costs actually and reasonably incurred in performance are proper subjects of compensation: Amann Aviation, at 81, 99, 134-135. If the contract was a loss making one, the innocent party's recovery will be limited to the extent (if at all) to which expenditure would have been recouped through continued performance: Amann Aviation, at 99. 937 (4) If the innocent party can establish expenditures which would not have been sustained, or other detriments which would not have been suffered, but for the breach or repudiation, damages for those losses will be recoverable (subject to the remoteness rule): Amann Aviation, at 128; Carr v J A Berriman Pty Ltd (1953) 89 CLR 327; TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130. As was said in Tito v Waddell (No 2) [1977] Ch 106 at 332: "if the plaintiff can establish that his loss consists of or includes the cost of doing work which in breach of contract the defendant has failed to do, then he can recover as damages a sum equivalent to that cost." 938 (5) Loss or damage will not be recoverable if it is too remote, the tests of remoteness being those stated in what are described as the two limbs of Hadley v Baxendale (1854) 9 Ex 341 at 354. For present purposes those tests can be expressed in the statement of principle formulated by Lord Reid in C Czarnikow Ltd v Koufos [1969] 1 AC 350 at 385 and which has been adopted in this country: see Baltic Shipping Co v Dillon (1993) 176 CLR 344 at 368: "The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation." 939 (6) The question whether a loss was of a kind that should have been within the contemplation of the party in breach commonly arises where property or services the subject of a contract is/are being acquired for a particular use or for resale by the innocent party and loss is suffered because that use or resale is prevented, delayed or can only reasonably be secured by substituted performance. In such cases the contract can give rise to two separate expectations, the one being receipt of the promised performance, the other being the putting of that performance to some particular use: see Trietel, Law of Contract, 831 (8th ed); Greig and Davis, The Law of Contract, 1379; McGregor on Damages, paras 279-280 (16th ed); and see eg Alucraft Pty Ltd (in liq) v Grocon Ltd (No 2) [1996] 2 VR 386 at 389ff. As McHugh J observed in Amann Aviation, at 163: "In such a case, a plaintiff may be able to recover for both moneys expended and loss of profit, although great care needs to be taken that double counting does not occur." On the rule against "double recovery" see generally Tilbury, Civil Remedies, vol 2 [13027]ff. 940 (7) In cases of back-to-back or relational contracts, one particular species of damages is of some importance. It is that which arises where one party's breach of, for example, a sub-contract puts the other party to that contract in breach of the head contract as, for example, for breach of warranty or for delayed delivery: see eg Agius v Great Western Colliery Company [1899] 1 QB 413. Where legal proceedings are taken under the head contract against the party so put in breach and damages and costs are recovered against it, that party may in turn (subject to considerations of remoteness) recover those damages and costs in proceedings under the sub-contract against the party in breach as part of its damages occasioned by the breach: Hammond & Co v Bussey (1887) 20 QBD 79; see generally, McGregor on Damages, para 758ff, para 769ff (16th ed); Jacobs, Damages in a Commercial Context, [6.54]; Burrows, Remedies for Torts and Breach of Contract, 154-155 (2nd ed); for the quite different situation that obtains where earlier proceedings are brought between the same parties, see Avenhouse v Hornsby Shire Council (1998) 44 NSWLR 1. 941 (8) I will refer below to one particular head of damages claim advanced by BHP-IT. That is a claim for $1,132,396 for costs of managing the dispute raised by GEC Marconi. All I would note here is that current Australian authority would suggest that a loss is not to be presumed from the mere fact of incurring dispute management costs as such: see Christmas Island Resort Pty Ltd v Geraldton Building Co Ltd (No 4) (1995) 16 WAR 277; see also Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 at 152. 942 When considering BHP-IT's claim for losses in performing the amended Head Contract from 1997, I will refer separately to the principles governing recovery of damages (a) for loss of use of an asset, and (b) for remuneration for using one's own resources to remedy damage sustained as a result of another's wrong.
(i) The recording of costs 948 To determine labour costs associated with work performed on any project, BHP-IT divided its labour resources into "skill pools". These skill pools grouped together personnel with similar capabilities. Each skill pool was then divided into 15 levels reflecting the potential range of experience and seniority of the people within each skill pool. BHP-IT then determined an hourly rate for each of these levels to reflect the actual cost to BHP-IT associated with a person within that pool or level performing one hour of work. This rate was called an "hourly cross charge rate". These rates were reviewed by the finance department on a six monthly basis. 949 The hourly rate was determined by reference to the actual salary costs of each person within a level. Added to these costs were overheads which would be directly incurred by the skill pool itself, such as office space, stationery and computers. In circumstances where employees worked off site and thus consumed less direct overhead costs, this would be reflected in the budget set for these items. The hourly cross charge rates for each skill level were loaded into BHP-IT's accounting system. 950 BHP-IT's employees would assign their time to the project code applicable to the work that they had undertaken on their timesheet: see below on "project codes". Those timesheets would then be entered into BHP-IT's time recording system. Once the time so entered had been authorised, it would then be transferred to BHP-IT's accounting system. A cost would then be allocated to the relevant project code by multiplying the time assigned to the code by the particular cross charge rate relevant to the employee in question. BHP-IT used cross charge rates to determine as accurately as possible the actual labour costs associated with the deployment of labour on any particular project. This in turn enabled it to employ a standard cost plus pricing methodology to determine prices to be charged for work quoted or undertaken on all BHP-IT projects. 951 All costs incurred in performing work under the rubric of the Head and Sub-Contracts were collected by a group of project codes. These codes, for present purposes, were project specific, so that there was a discrete group of codes for the ADCNET project. It is unnecessary to set out the codes employed in any detail other than to say that they identified (a) costs and revenues associated with the fixed-price part of the ADCNET contract; (b) differentiated between, for example, labour costs incurred, management costs, and costs for time and material work; and (c) sub-categorised packages of work. The purpose of the hierarchical structure of the codes was that it allowed BHP-IT to track the costs associated with the ADCNET project. 952 As will be seen, BHP-IT relies upon specific project codes as being relevant to its damages claim.
(ii) BHP-IT's Internal Margin 953 BHP-IT's management had set an internal margin for the company's activities which was a rate applied to the actual base costs to be incurred in performing a contract so as to recover for costs not directly allocated to projects and so as to generate the minimum profit that BHP-IT was expected to return. This internal margin was the minimum percentage by which all base costs were adjusted internally before a price was submitted so as to reflect: (a) recovery of the divisional overheads attached to the provision of the service such as use of company resources like the divisional management; (b) recovery of the corporate overheads attached to the provision of the service such as administrative costs, sales and marketing resources, and use of company equipment; and (c) the inclusion of the specific minimum profit targets that were set internally by BHP-IT. 954 The total internal margin for the division of BHP-IT's having responsibility for the ADCNET project was 49%. This required the expected cost base of a project to be multiplied by a factor of 1.49. The margin for divisional overheads was 12% until the 1997-1998 financial year when it was revised to 7.2%. The margin for corporate overheads was 22%.
(a) Additional Factual Material 958 Before committing itself to the Head Contract and Sub-Contract in September 1994, BHP-IT made its own estimate of costs and returns of the two contracts. A Financial Approval Summary that was signed off by senior officers of BHP-IT (including McDart) estimated that, if GEC Marconi performed the Sub-Contract, BHP-IT's own direct costs for management, etc, would be $2,094.111. Provision of $461,381 was made for "Contingency and Risk" of $461,381, the estimated gross profit was $835,912 and the estimated net profit was $820,912. 959 A BHP-IT Marketing and Operations Report for the ADCNET project of December 1995 recorded that expenditure was below budget, revenue and profit were "ahead of budget" and that the risk and contingency was "intact". 960 Documents prepared on the ADCNET project for BHP-IT's quarterly financial reviews of August and November 1996 both indicated (in overhead slides) that while the reported status of the project was 68% complete its actual status was probably 20-40%. Documents in each of those reviews contained project financial estimates which, as the following table for the November review indicates reproduced the 1994 estimates with variations. Those variations were attributable, it would seem, to contract variations resulting in additional costs, allowances for risk and profit. The substance of the November Table was as follows: At Contract Signoff August 96 Review November 96 BHP direct costs $2,094,111 $2,160,102 $2,160,102 Oncharge costs $6,218,260 $6,554,233 $6,554,233 Risk & Contingency $461,381 $488,260 $488,260 Project Total Cost $8,773,752 $9,202,595 $9,202,595 Total Revenue $9,609,663 $10,254,414 $10,254,414 Gross Contribution $820,912 $1,036,819 $1,036,819 GCM % (excl oncharge) 26.6% 32.3% 32.3%
The reference GCM at the foot of the Table was to "Gross Contribution Margin". While the quarterly review documents contained detailed slides dealing with risks of various varieties (eg technical, schedule, etc), the probability of their eventuating and the allowance that should be made for them, the schedules do not indicate clearly which, if any, of these risks were ones to which the risk and contingency allowance in the 1994 estimates related. 961 One of the documents contained in the November review bundle does appear on its face to refer to the contingency provision contained in the November estimates. It was entitled "Additional Costs Due to Dispute As At 10/11/96". It is as follows: ADDITIONAL COSTS DUE TO DISPUTE AS AT 10/11/96 Contract Due to End June 1996 Project Costs Incurred Since June Management $132,407 Software, Testing & Review $119,213 Subtotal $251,620
Risk & Contingency Provision as per Financial Summary $488,259 Risk and Contingency Provision Remaining $236,839
Commercial and Legal Cost to 10/11/96 Commercial (from SAP) $154,986 Legal (from SAP) $29,333 TOTAL $184,319 Risk Contingency Provision Remaining $52,520
This document was not explained by any witness. It was relied upon by the Commonwealth in submissions. 962 In giving evidence on the November documents Mr Brent said that his recollection was that whilst the profit position of the project looked good at that time, "the risk position did not". 963 By the time GEC Marconi had repudiated the Sub-Contract, BHP-IT had received milestone payments of $5,575,000 and had in turn paid GEC Marconi $3,875,000 for its achievement of the same milestones. Mr Hammond, who was BHP-IT's Vice-President of Finance at the time, accepted that the actual costs for obtaining these milestones were probably in excess of $900,000. This figure was based on labour costs and project expenses of $706,200 which were charged to ADCNET project codes for the period 1 June 1994 to 31 May 1995 and to which he said the usual internal margin had to be applied. 964 Between June 1995 and December 1996 BHP-IT had incurred expenses as well in relation to Milestone 4000 though that milestone, as I have found, was never achieved. The payment to be made to BHP-IT for Milestone 4000 was $2,390,000 of which $1,250,000 was to be paid in turn by BHP-IT to GEC Marconi leaving BHP-IT with $1,140,000. 965 Mr Hammond's evidence, again based on costs charged to ADCNET project codes for the period 1 June 1995 to 31 December 1996, was that BHP-IT had incurred costs (made up of labour costs and project expenses) of $1,123,844 on the ADCNET project. After applying BHP-IT's internal margin to this figure, Mr Hammond's evidence is that the cost incurred by BHP-IT in this period was $1,616,551 - a sum greater (by almost $0.5 million) than what have been retained from Milestone 4000. 966 Mr Hammond gave the following additional evidence in cross-examination: "Q. So whereas looking at the first stage of the project through to milestone 3,000 there was apparently a profit earned in relation to those milestone payments, your calculations would suggest in relation to milestone 4,000 there was a loss? A. That would suggest that. Q. Do I understand that what you haven't attempted to do is look beyond milestone 4,000 to see whether or not this contract would have been loss making or profit making to BHP-IT if GEC Marconi had carried on with it; you just don't know? A. No, I don't. Q. Is this right: because you haven't done that exercise you can't say whether the financial consequence to BHP-IT of performing the varied contract is any better or worse than the financial consequence to BHP-IT of performing the original contract? A. No, I couldn't say that." The remaining three milestones after Milestone 4000, would have resulted in payments of $1,644,569 and $1,093,260 to BHP-IT and GEC Marconi, leaving BHP-IT with a net return from the payments of $551,309. 967 When GEC Marconi purportedly terminated the Sub-Contract on 10 December 1996, it withdrew all of its staff from the ADCNET project. It sought as well to recover a range of data which it said was, variously, (a) non-project related; (b) its own copy of project-related material; (c) its own software; and (d) its own commercial-in-confidence material. 968 By that time meetings had taken place between BHP-IT and DFAT to discuss options for resolving the dispute with GEC Marconi. A minute of Les Cook of 23 September 1996 recording one such meeting commented that: "It seems clear that BHP-IT could continue the project without EASAMS only by starting from scratch or by purchasing intellectual property rights in work done to date from EASAMS. The same options face DFAT if its contract with BHP-IT is terminated." 969 GEC Marconi's performance of the Sub-Contract had been such that, of the five builds to be undertaken in the software development process, it is not clear on the evidence whether Build 2 was ever completed. It had failed integration testing in early 1996 and had had corrective work done on it during the first half of 1996. There is no evidence that any of the other three remaining builds were completed before GEC Marconi terminated. 970 GEC Marconi had experienced considerable difficulties with the FRS. A letter of Mr Brent to Mr Goldsmith of 23 May 1996 recorded (inter alia) advice given by Mr Goldsmith at a project management meeting that "53% of the ADCNET Functional Requirements Specification … is invalid/unworkable". 971 Mr Brent's evidence is that after 10 December 1996 BHP-IT began to work on the "resurrection of the program" and to "rebuild the system from scratch". Explaining why it was begun "from scratch". Mr Brent said in oral evidence: "A. In my assessment at the time, the picking up a project of this level of complexity after the bulk of the people involved in the project were no longer available to us was very difficult, because with the people goes the [domain] knowledge. Also I was of the view by that time that in terms of work value there wasn't very much there. And I think I expressed those reservations in some letters." 972 Les Cook similarly gave evidence that his view as at September 1996 was that the only way of proceeding with ADCNET was to start from scratch. He was concerned about the value of the work that had been done to that date. 973 By December 1996 Les Cook was expressing his concern that if the existing ADCNET contract was performed several problems were foreseeable which were attributable, largely, to the estimated 3-year delay before delivery of release 3. One of these was that the development was based on versions of COTS software which were already outdated. 974 An ADCNET Project Status Report of 16 April 1997 recorded that from 10 December 1996 the project team (made up of twelve persons from BHP-IT and DFAT) had been engaged in a review of the ADCNET project and its requirements. A significant element in that review was an analysis of the entire FRS. By the end of April 1997 BHP-IT considered itself to be in a position to propose a basis for resuming the development of the project. Though that proposal was not accepted and negotiations continued in consequence, the review of the FRS continued leading to an agreement in August/September 1997 to adopt a new version of the FRS. 975 By November 1997 BHP-IT and the Commonwealth were exchanging proposed drafts of an amended Head Contract and Schedules. On 24 December the Variation Agreement was signed. Its terms and effect are considered later in these reasons: see Part V: The Commonwealth's Cross-Claim: The 1997 Variation Agreement. For present purposes all that need be said of that agreement is (a) it amended the Head Contract and its schedules; (b) under it, BHP-IT agreed to perform the amended contract itself for the original contract price but according to a new schedule; (c) in so doing, BHP-IT would start from scratch with all work previously done by GEC Marconi being abandoned; (d) new and fewer milestones were agreed; and (e) BHP-IT was to return to the Commonwealth the second and third of the milestone payments it had already received, but was to retain a sum equivalent to the first milestone it had received as a mobilisation payment (ie Milestone 1000) under the newly agreed schedule. 976 Mr Brent was succeeded by Manfred Rentz as BHP-IT's Project Manager in July 1997. In November/December 1997 along with other members of BHP-IT's project team, he prepared the Proposal Approval Form ("PAF") for the 1997 Variation Agreement. This was a standard form used by BHP-IT to determine prices for projects for which approval for quotation would be sought. 977 This PAF was not prepared using BHP-IT's usual cost plus methodology as the price was set by the Variation Agreement itself, being the original Head Contract price of $9,609,663. Nonetheless Mr Rentz had a BHP-IT employee conduct what is described as a "Function Point Count" to evaluate the size of job that was to be undertaken and to enable an estimate to be made of labour needed to complete it. That form of analysis permitted an estimate to be made of the labour costs of the project. 978 In his witness statement Mr Rentz explained the bases upon which the other estimates in the PAF were made. I have set out below three of the columns in the PAF. The one matter to which I would draw attention is the risk allowance of $2,962,151. The manner in which the figures making up this sum were calculated was explained by Mr Rentz in his witness statement. The documentation used in their calculation was tendered. 979 The PAF produced in November/December 1997 - and signed off by Mr Dart on 23 January 1998 - was, in part as follows: FINANCIAL DETAILS BEST CASE COST RISK ALLOWANCE BID PRICE CONTRIBUTION %
Oncharges . Forte Software License $337,000 $0 $337,000 $0 0.00% . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 Subtotal: $337,000 $0 $337,000 $0 0.00% Direct Costs . Labour (based on cross-charge rates) 1.84% . Project Management $2,510,057 $276,584 $9,143,780 $6,357,139 69.52% . Software Dev $2,498,214 $2,685,567 $0 -$5,183,781 . Total Negotiation $587,608 $0 $0 -$587,608 . Training & Documentation $125,000 $0 $0 -$125,000 . Consultants $235,000 $0 $0 -$235,000 . Warranty $57,750 $0 $0 -$57,750 . $0 $0 $0 . $0 $0 $0
Service Products (based on unit charges) . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0
Expenses 0.00% . Hardware leasing $24,989 $0 $24,989 $0 0.00% . Materials $10,000 $0 $10,000 $0 0.00% . Travel & Accommodation $93,800 $0 $93,800 $0 0.00% . $0 $0 $0 $0 . $0 $0 $0 $0
Admin & Finance Charges . Hardware purchases $0 $0 $0 $0 . Corp/Bank Guarantee $60,000 $0 $0 -$60,000 . Prof Indemnity Insurance $108,000 $0 $0 -$108,000 . Cost of Working Capital (if applic) $0 $0 $0 $0 . $0 $0 $0 $0 Subtotal: $6,310,418 $2,962,151 $9,272,569 $0 0.00% PROPOSAL TOTAL: $6,647,418 $2,962,151 $9,609,569 $0 0.00% PROPOSAL GROSS OPERATING MARGIN = 0.00% TARGET = 31.75%
980 In May 1999 a revised version of the above PAF was prepared internally by BHP-IT. It reflected labour prices, divisional and corporate overheads and profit margins that BHP-IT was using in projects for 1998 but also included some of the known extra costs incurred on the project in 1998 such as the Forte license and consultancy. It was, in part, as follows: FINANCIAL DETAILS BEST CASE COST RISK ALLOWANCE BID PRICE CONTRIBUTION %
Oncharges . Forte Software License $337,000 $0 $337,000 $0 0.00% . Development Software $65,793 $0 $65,793 $0 0.00% . Forte Consultancy $421,388 $0 $442,457.40 $21,069 4.76% . $0 $0 $0 $0 . $0 $0 $0 $0 Subtotal: $824,181 $0 $845,250 $21,069 2.49% Direct Costs . Labour (based on cross-charge rates) 32.85% . Project Management $2,510,057 $276,584 $4,152,096 $1,365,454 32.89% . Software Dev $2,498,214 $2,198,386 $6,997,933 $2,301,334 32.89% . Total Negotiation $587,608 $0 $875,536 $287,928 32.89% . Training & Documentation $125,000 $0 $186,250 $61,250 32.89% . Consultants $235,000 $0 $350,150 $115,150 32.89% . Warranty $57,750 $0 $86,048 $28,298 32.89% . Message Switch CR $542,668 $34,622 $853,891 $276,601 32.39% . $0 $0 $0
Service Products (based on unit charges) . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0 . $0 $0 $0 $0
Expenses 0.00% . Hardware leasing $24,989 $0 $24,989 $0 0.00% . Materials $10,000 $0 $10,000 $0 0.00% . Travel & Accommodation $93,800 $0 $93,800 $0 0.00% . $0 $0 $0 $0 . $0 $0 $0 $0
Admin & Finance Charges . Hardware purchases $0 $0 $0 $0 . Corp/Bank Guarantee $60,000 $0 $0 -$60,000 . Prof Indemnity Insurance $108,000 $0 $0 -$108,000 . Cost of Working Capital (if applic) $0 $0 $0 $0 . $0 $0 $0 $0 Subtotal: $6,853,086 $2,509,592 $13,630,692 $4,268,014 31.31% PROPOSAL TOTAL: $7,677,267 $2,509,592 $14,475,943 $4,289,084 29.63% PROPOSAL GROSS OPERATING MARGIN = 29.63% TARGET = 30.76%
981 Mr Hammond, who was BHP-IT's Vice-President of Finance, gave evidence that this Revised Summary demonstrated that the total contract price or "bid price" which BHP-IT would have required for this project in and around December 1997 was $14,475,943, had the agreement been made on a fair and commercial basis and had BHP-IT been made aware of the true circumstances and conduct of the other parties. 982 One amount in the "Best Case Cost" which should be noted is the sum for the "Message Switch CR" of $853,891. That sum related to CR007 which was agreed to in August 1998 and the purpose of which was to develop the expedited Release 3 software so as to facilitate the early decommissioning of the IBM system: see "The Commonwealth Cross-claim: Retention of the IBM Classified Message Switch System". It represents the actual contract price of the change request and includes an actual contribution of 32.39 per cent. 983 After the signing of the Variation Agreement, BHP-IT assembled its own project team and proceeded to perform the amended Head Contract and later some number of agreed Change Requests. 984 In September 2000 discussions were held between BHP-IT and the Commonwealth concerning a suspension of work on the ADCNET project. A deed of termination had previously been proposed, but not agreed. On 22 September agreement was reached to suspend work on the ADCNET contract pending the resolution of the present litigation. 985 Mr John Crighton, at the time an Assistant Secretary in DFAT, with responsibility for the IM Branch, indicated in his evidence that in mid-1999 he had formed the view that, apart from the ER3 software, further expenditure by DFAT on the ADCNET contract would be a waste of public money and that the contract should otherwise be terminated. 986 Mr Rentz gave evidence that as far as he knew his company (which had been taken over by Computer Services Corporation ("CSC")) would have been happy to have been released from the contract. 987 Mr Crighton's oral evidence was that by 1999 DFAT had committed itself to the SATIN project on which the future technology requirement for DFAT was to be based. In late December 1999 a CR was raised to investigate the feasibility of amending any aspect of the R3 software so as to make it usable and to bring it into conformity with the SATIN system. The advice Mr Crighton received was that there were better, smarter ways of DFAT achieving the result it wanted than by trying to bring the remainder of the R3 contract into conformity with the SATIN approach. He considered that the balance of the ADCNET software was in 1999, and remained, completely redundant. Up until his retirement from DFAT in February 2001 BHP-IT had not approached him seeking to complete the contract. 988 There are two additional matters to which reference should be made. The first relates to the financial status of ADCNET project at the end of September 2000. Mr Rentz's summary was that: (a) the agreed Contract price was $10,463,461.00 representing the original fixed price, plus the cost of Change Requests approved by the Commonwealth; (b) the forecast cost was $10,186,978.00; (c) the project was estimated to be 51.28% complete and the software development 55% complete; (d) actual revenue received as at September 2000 was $7,109,769.00; (e) actual cost of the project as at September 2000 was $5,136,122.00; (f) the estimated earned value for work up to September 2000 was $6,605,966; (g) the calculated earned value revenue adjustment as at September 2000 was $1,743,086.00 in deficit, indicating that BHP-IT had received greater milestone payments than the estimate work completed by reason of the fact that milestone payments were paid in advance; and (h) using the estimated value and actual revenue figures, a sum of $503,803 (the difference between $7,109,769 and $6,605,966) was to be refunded to the Commonwealth as that amount represented a prepayment for work not yet completed. In oral evidence he explained by reference to contemporary documentation that, as at September 2000, it had been estimated that for a Contract price of $10,463,461.00, the project would have earned a contributional profit of $276,483.00, assuming that risk allowances allowed of $1,774,834 were fully exhausted. By September 2002 only $17,865 had been expended and he accepted that if those risk allowances were not exhausted, there would have been an additional contribution. 989 The second matter concerns oral evidence of a very general character given by Mr Dart and Mr Hammond as to BHP-IT's business in the period from the end of 1997 to 1999. Mr Dart indicated that in the latter part of that period the company enjoyed eighteen months of growth outside of the domain of BHP, at an annual rate of 40 per cent. It was a period for BHP-IT of 'reasonable buoyancy' in the market place. It was also a period of substantial demand for software engineers. For his part Mr Hammond indicated that in the period 1996 to 1999 BHP-IT had high turnover rates of staff. There was strong growth in the IT industry across all sectors. As a result, there were considerable shortages of skills in this area. Accordingly, in this period, all risk analyses undertaken by project managers involved assessments of costs involved with turnover or potential turnover of key project personnel.
(b) Submissions and Conclusions 990 I should indicate at the outset that two matters have added considerably to the complexity of the issues raised by these claims. The first is the 1997 Variation Agreement and in particular its requirement for the repayment of the sums received for achievement of Milestones 1000 to 3000 under the original Head Contract. The second is the Suspension Agreement in September 2000. They rob the claims of the relatively straightforward character they would otherwise possess. 991 As I understand it BHP-IT characterises the lost benefit of the Sub-Contract as being the Developed Software itself which GEC Marconi had contracted, but failed, to deliver to it. 992 The lost benefit of the Head Contract it contends is the difference between the respective contract prices of the Head Contract and the Sub-Contract, ie the sum of $3,391,309 (or else that sum less $264,067 which were performance costs it did not have to incur to complete the Head Contract because of GEC Marconi's repudiation). It arrives at this sum, notwithstanding that BHP-IT had received $5,575,000 under the Head Contract, because BHP-IT was obliged to repay that amount under the Variation Agreement. In consequence of that repayment it is said that the revenue received by BHP-IT from the Commonwealth and the payments it made to the Commonwealth were "cash neutral". BHP-IT disputes the contention of both GEC Marconi and of the Commonwealth that the Milestone 1000 payment was not repaid but was retained by BHP-IT. The sum in question ($1,250,000), it says, was and was intended to be the agreed "Mobilisation" payment under Schedule 8 of the amended Head Contract for "Formal resumption of project work". 993 BHP-IT's most contentious claim of the three presently under consideration relates to the cost of performing the Variation Agreement. The loss that is claimed under this head is said to fall squarely within both limbs of Hadley v Baxendale (a matter to which I will return below). The premises of this claim are that in the circumstances BHP-IT had no real choice but to perform the software development itself but at no change to the original contract price. It was in consequence obliged to complete the work GEC Marconi was engaged to perform, but without reasonable remuneration for the deployment of its resources in so doing. It claims it is entitled to claim that loss from GEC Marconi and it seeks to establish it by reference to the 1999 Revised Version of the PAF. Had BHP-IT been able to charge a reasonable price for the services it actually performed using its standard cost plus methodology, BHP-IT contends that the return it would have expected to earn was $6,798,767 (being made up of the projected contribution of $4,289,084 and the total risk allowance of $2,509,592). From that sum $276,483 was to be deducted (being the forecast contribution for completing the ADCNET project) leaving a loss for present purposes of $6,522,284. I would note in passing that there is an obvious inaccuracy in the calculations so made, though in respect of less than $100. 994 Alternatively it is said that, if BHP-IT was relieved of its obligation to perform the balance of the amended Head Contract in consequence of the Suspension Agreement in September 2000, it should nonetheless be entitled to receive 55% of the estimated contribution of $6,798,767. This would be $3,739,322. But as it had been paid $1,469,844 more for the 55% per cent of the work completed than had actually been earned, it must account for that sum so reducing its actual loss to $2,269,478. 995 For its part GEC Marconi has attacked the claims made on a number of broad fronts. The criticism in the round is made of BHP-IT's damages claims that there is an absence of any evidence showing: (a) what financial position BHP-IT would have occupied had GEC Marconi fully performed the Sub-Contract; (b) what expenses would have been incurred by BHP-IT in any event had the Sub-Contract been fully performed; and (c) a comparison between the financial outcome to BHP-IT had the Sub-Contract been fully performed and the financial outcome actually achieved in performing and completing the software development work. A more specific criticism is then made of the evidence provided by Mr Hammond and of the documentation relied upon to support the individual claims. It is contended that Mr Hammond was not a person able to present any reliable analysis of actual loss and damage suffered and that he did not attempt to ascertain the actual loss suffered by BHP-IT as distinct from the actual costs incurred by BHP-IT. The reliance placed on the costing methods used by BHP-IT is attacked on the same ground. The mere allocation of a cost to a project code, it is said, does not of itself identify a recoverable loss consequent on a breach of contract. 996 In relation to the claim for profits that would have been derived if BHP-IT had been able to negotiate the Variation Agreement at arm's length, it is contended that such a claim is based on a fallacy. There would have been no scope to enter into the Variation Agreement had GEC Marconi performed the Sub-Contract. 997 It also is submitted that the 1999 Revised PAF ought not be relied upon as an accurate reflection of BHP-IT's bid price would have been and it is entitled to little weight as it clearly was brought into existence for the purpose of these proceedings. 998 Before indicating my own conclusions on the claims, there are three preliminary matters that need to be addressed. The first relates to the September 2000 Suspension Agreement, the second, to Hadley v Baxendale; and the third, to the agreement to start from scratch. 999 First, the Suspension Agreement. The evidence concerning this agreement, when considered in the context of the direction that was by then being taken by DFAT in relation to the SATIN project, leads inexorably to the conclusion that there was no practical likelihood at all of the remainder of the amended Head Contract being completed or of BHP-IT being required to do so. I find accordingly. To adapt an answer given by Mr Crighton, DFAT would not meet its future needs "by continuing to develop a dinosaur". The ADCNET project's time had passed. 1000 Secondly, Hadley v Baxendale. As I have indicated, BHP-IT contends that the losses claimed fall squarely within both limbs of Hadley v Baxendale. I do not set out its submissions (with which I am in general agreement) because I consider this to be a clear case in which, save in one possible respect noted below, remoteness of damage is not a significant issue. As back-to-back contracts, the performance of the Head Contract and the Sub-Contract were, and were known from the time of their execution to be, mutually interdependent: Hydraulic Engineering Co Ltd v McHaffie, Goslett & Co (1878) 4 QBD 670; R and H Hall Ltd v W H Pim (Junior) and Co Ltd (1928) 33 Com Cas 324; Brooking on Building Contracts, [14.11] (3rd ed); 22 Am Jur 2d "Damages", s469ff. Equally the respective practical roles of the parties to the two contracts were well known and understood - the real customer was the Commonwealth; BHP-IT was the project manager; and GEC Marconi, the builder. It necessarily would have been apparent to all parties at the time that (i) a repudiation by GEC Marconi would have put BHP-IT in breach of its obligations to the Commonwealth; (ii) if the Commonwealth elected to affirm the Head Contract despite such a breach, BHP-IT would be confronted with the choice either of engaging a fresh sub-contractor without any domain knowledge at commercial rates, or of using its own resources, to perform the work that GEC Marconi had failed to do; and (iii) given that the price for the Head Contract was a fixed one, and fixed on the assumption that BHP-IT's role in it was not that of builder, whichever choice was made by BHP-IT it was likely to result in it incurring a loss in performing its obligations under the Head Contract. Equally, a reasonable person in GEC Marconi's position would have realised that, if BHP-IT had to make such a choice because of GEC Marconi's action and chose to do the work itself, it would result in an actual performance of the Head Contract quite different from that envisaged at the time of execution of the two contracts. I am satisfied that in light of what it knew at the time of entry into the Sub-Contract, GEC Marconi would have realised that, if it had repudiated the contract at a time significantly downstream in the contract's life, the likelihood would be that BHP-IT would be compelled to undertake further performance itself and at significant cost to itself. I am equally satisfied that these consequences were sufficiently likely to result from the breach of contract as makes it proper to hold that they flowed naturally from it. 1001 In one respect, though, I consider the Hadley v Baxendale issue to be possibly somewhat more problematic. BHP-IT has made a claim for loss incurred in performing the amended Head Contract which included loss of return made up of loss of overheads and profit. Both, it is said, resulted from its having to use its own personnel and resources in what was in fact a non-profit making activity and having to do so because of GEC Marconi's default. Consistent with what I have held above, no issue of remoteness could arise in relation to the loss of overheads, there being a reasonable likelihood of such costs if BHP-IT were to perform the work itself. Somewhat more problematic is the claim for loss of profits. 1002 GEC Marconi had no notice at the time of entry into the Sub-Contract of any particular profit-making activities in which BHP-IT was likely to deploy its labour and resources in the future. At best GEC Marconi's reasonable realisation would have been that, if BHP-IT deployed its own labour and resources in performing the amended Head Contract, it would in consequence have been unable to use that labour and resources in the pursuit of the trading activities carried on by BHP-IT in the ordinary course of its business. 1003 There, doubtless, are cases in which the nature of the business conducted by the innocent party is such that a loss of profits is an almost inevitable consequence of the diversion of labour and resources to do the work not done by the party in breach: cf Royal Pioneer Paper Box Manufacturing Co Inc v Dejonge 115A 2d 837 (1955). I do not consider the present to be such a case. 1004 However, I am satisfied that the dimensions of the work that GEC Marconi left to be done and the length of time likely to be needed to do it were such that, on the information it had at the time the Sub-Contract was entered into, it should have realised that, if BHP-IT deployed its own labour and resources to do that work, a loss of profits in BHP-IT's trading activities was likely to result as a natural consequence of that deployment. I do not consider the loss of profits claim to be too remote. 1005 Thirdly, the agreement "to start from scratch". I begin by emphasising the obvious. When BHP-IT agreed to develop the ADCNET software itself, it was performing its own obligation under the Head Contract, it was not purporting to complete the Sub-Contract. The "start from scratch" agreement has to be seen in that context. I have referred to the evidence concerning the need for revision of the FRS, and the contemporary understanding that if BHP-IT was to perform the Head Contract itself it would probably need to start from scratch. I have also referred to Mr Brent's explanation as to why there was a "start from scratch". 1006 For my own part I am satisfied that the agreement to do this was a reasonable one that was justified in the circumstances. Given the need for revision of the FRS, the loss of team members with domain knowledge consequent upon the departure of GEC Marconi's project team, the state of development of the builds and, most importantly, the risk that BHP-IT was assuming in consequence of the breach, the agreement to start from scratch was in the circumstances "a reasonable course to adopt": Bellgrove v Eldridge (1954) 90 CLR 613 at 618; see also S & D Mechanical Contractors Inc v Enting Water Conditioning Systems Inc 593 NE 2d 354, at 361 (1991). Furthermore, I do not consider that BHP-IT could properly have been expected to have negotiated with GEC Marconi to acquire such intellectual property rights, etc it derived from the project as might have been of assistance in BHP-IT's own performance of the Head Contract. It has not been suggested that assistance of that variety was available. 1007 Turning now to my own conclusions, I should first indicate what I consider to be the bearing the 1997 Variation Agreement has on the losses claimed. First, the Variation Agreement obliged BHP-IT to repay the Commonwealth not only the net receipt that BHP-IT had from the Milestone payments (ie $1,700,000) but also the amount paid over to GEC Marconi ($3,875,000). That repayment had two consequences. The return of the $1,700,000 eliminated the advantage BHP-IT had enjoyed in being able to recoup costs already incurred. In consequence the repayment ensured that all of those costs (which I later find to be $1,830,044) were actual wasted expenditure. The payment of $3,875,000 to GEC Marconi, likewise, had the character of wasted expenditure. The repayment of it to the Commonwealth merely accentuated that for the Commonwealth the amount in question had a like character vis-ŕ-vis BHP-IT. This repayment, though, did not then represent a loss to BHP-IT at GEC Marconi's hands as it had already recouped its payment to GEC Marconi by having recourse to the financial securities: see Part II: The Call on Financial Securities. 1008 Secondly, the effect of the Variation Agreement on the claim for the loss of the benefit of the Head Contract was that it rendered impossible the actual performance by, and the return to, BHP-IT that was envisaged under the original Head Contract/Sub-Contract arrangements. The milestones had been changed as had BHP-IT's actual role in the new arrangement. BHP-IT could no longer render such performance as would secure the payments from the Commonwealth to which it previously would have been entitled on the basis contemplated under the original arrangement with GEC Marconi. 1009 It is important to appreciate the character of the actual claims made by BHP-IT. The claims for the lost benefit of the original Head Contract and for costs incurred until December 1996 are really claims in the alternative, as I will indicate. Both relate to the performance of the original Head Contract, the former being for expectation damages, the latter, for wasted expenditure. 1010 The claim for costs incurred in performing the amended Head Contract is in the nature of a claim for additional costs incurred - hence a consequential loss sustained - which would not otherwise have been incurred but for GEC Marconi's repudiation. Though, as will be seen, the costs claimed are constituted in part by a loss of profits in consequence of the performance BHP-IT actually rendered, the claim itself is not for any expectation loss as such. Nor is it a conventional claim for damages for loss of an opportunity. It is for an actual consequential loss suffered as a result of having to perform the amended Head Contract consequent on GEC Marconi's failure to perform the Sub-Contract. 1011 Each of the two types of claim - the one relating to the performance of the original Head Contract, the other relating to performance of the amended Head Contract - represent separate and distinct heads of damage that BHP-IT is entitled to claim. They do, though, overlap in one respect that does give rise to the possibility of double recovery. The claim for the lost benefit of the original Head Contract as put takes no account at all of BHP-IT's later performance of the amended Head Contract. That later performance does not of itself preclude the making of this claim. It stands apart from it for the following reason. I have found that the Variation Agreement amended, but did not discharge, the Head Contract. BHP-IT's obligation to perform that contract remained, albeit it was amended in significant respects. However, considered from the standpoint of the parties to the Sub-Contract, and bearing in mind that the present claim is for breach of the Sub-Contract, the effects of the Variation Agreement were of a profoundly different character. As I have indicated above, that agreement rendered impossible the actual performance by, and the return to, BHP-IT that was envisaged under the original Head Contract/Sub-Contract arrangement. The milestones had been changed as had BHP-IT's actual role in the arrangement. BHP-IT could no longer obtain the payments from the Commonwealth to which it previously would have been entitled. A different performance was being rendered and was being paid for differently, albeit for an unchanged price overall. BHP-IT was, in consequence, entitled to claim expectation damages resulting from loss of the benefit of the original Head Contract as it would have been performed had GEC Marconi not repudiated. The hypothetical situation to be considered in such a claim would not involve any consideration of BHP-IT's subsequent actual performance of the amended Head Contract. That performance was simply not envisaged by the scheme of the Sub-Contract and the original Head Contract. 1012 However, to the extent that the subsequent actual performance resulted in a net profit to BHP-IT that net profit had to be brought into account. Whether in its original or in its amended form it was on the Head Contract that BHP-IT expected to make its profit. To the extent it actually did so, notwithstanding GEC Marconi's default, it could not claim the full extent of its loss of net profits in the action against GEC Marconi on the Sub-Contract. If a profit was actually derived, it diminished to that extent the expectation loss suffered. That such a profit was derived in changed circumstances (ie by BHP-IT's own performance of the work) did not alter the character of that return. That it was earned in changed circumstances, though, gave greater significance to the consequential loss claim. It was that claim that dealt with the costs to BHP-IT of its own performance.
(i) The claims for the lost benefit of the Head Contract/costs incurred until December 1996. 1013 The second of these claims is in the alternative to the first, given the way in which BHP-IT has put its primary claim. The claim for loss of the benefit of the Head Contract is a claim for the difference between the amounts payable under the Head Contract and the Sub-Contract (ie $3,391,000). The basis on which that sum is claimed (or else that sum minus performance costs of $264,067 which it did not have to incur in consequence of the breach) is that if GEC Marconi had performed the Sub-Contract, BHP-IT would have received that sum and the assessment of what portion was cost and what was profit was irrelevant. It was always going to receive that sum. For reasons I give below I am unable to accept this simple and obviously abbreviated way of dealing with an expectation damages claim: and cf Hydraulic Engineering Co Ltd v McHaffir, Goshett & Co, above. 1014 The alternative claim for costs incurred to December 1996 were recoverable, if at all, as wasted expenditure. 1015 By way of preface to my consideration of the claims I should indicate that I consider that the sum of $1,250,000 in fact retained by BHP-IT on account of Milestone 1000 of the amended Head Contract was, and was intended by the parties to be, a bona fide "Mobilisation" payment for the "Formal resumption of the project work" under Schedule 8 of the contract. It was a sum from which costs incurred in anticipation of, and in the performance of, the amended Head Contract were intended to be recouped. 1016 The difficulty I have with the abbreviated method employed by BHP-IT to ascribe a value to the lost benefit of the amended Head Contract, is that it does not adequately identify the costs which BHP-IT was likely to have incurred "as and from [the date of the breach], in performing its own contractual obligations": Amann Aviation Pty Ltd, at 161. Those saved performance costs are to be deducted from the value of the benefits BHP-IT was still to receive under the Head Contract: ibid, 161-162. For this reason it will be necessary to plot a rather tortured path through the expenses, receipts and benefits (actual and estimated) of the original Head Contract. 1017 The figures relied upon by BHP-IT to establish the costs it actually incurred in the performance of the Head Contract up until GEC Marconi's repudiation are the raw project cost expenses that have been recorded internally by BHP-IT in project cost enquiry reports as having been incurred on the ADCNET project over the relevant period. They amount to $1,830,044. This is the aggregate of the costs (labour costs plus project expenses) recorded by BHP-IT for two periods (1 June 1994-31 May 1995 and 1 June 1995-31 December 1996) and which coincided with its achieving, in the first period, Milestones 1000 to 3000 ($706,200) and then, in the second, with its pursuing Milestone 4000 (ie $1,123,844). These figures do not include a sum for the internal margin that Mr Hammond purported to apply to them in his evidence. In light of its submissions, I do not understand BHP-IT to be now claiming that margin. In any event, I do not consider it likely that the figures containing the margins used by Mr Hammond reflected either BHP-IT's actual costs at the time or any contemporary appreciation that they were the actual costs incurred. The 1996 Quarterly reviews and Mr Brent's evidence of his recollection at the time suggest to the contrary. 1018 GEC Marconi has invited me to reject the evidence relied upon by BHP-IT to establish the actual costs "reasonably incurred by it in the discharge of its contractual obligations": Amann Aviation Pty Ltd, 81. To the extent that these costs were recorded as "Project Expenses", it is contended there was no evidence led as to their nature and to the reason for their having been incurred. As to the recorded labour costs, while at best demonstrating costs incurred, they do not demonstrate any actual loss And no provision has been made by way of discount for the likelihood that non-chargeable time was recorded. Additionally, it is said, some of the cost claimed in the first of the two periods mentioned above predated the signing of the ADCNET contracts. There is no evidence explaining what those "pre-contract" costs were. 1019 For its part BHP-IT contends that the relevant project cost enquiry reports upon which its calculations were based, though summary in form, were primary accounting records comprising extracts from the accounting ledgers of BHP-IT that utilised the methods of recording costs I have described earlier in these reasons. The discontinuance and replacement of BHP-IT's accounting system in 2000 prevented access to detailed cost data for every BHP-IT person who performed work on the project. BHP-IT submits that, given the evidence as to how the cost enquiry reports were prepared and used by BHP-IT to record its actual costs - I have not reproduced it here - they can be relied upon as the best primary evidence of the actual costs incurred by BHP-IT or else as evidence from which to make the best estimate of the damages sustained by BHP-IT. 1020 The raw figures as to costs that are relied upon by BHP-IT were booked by it to the ADCNET project when they were incurred. Though a deal more explanation of the nature of, and reason for, them would have been helpful, I am prepared to accept them as establishing the actual costs incurred by BHP-IT in performing the ADCNET contracts notwithstanding the level of generality at which they were presented in evidence. It would have been quite unreasonable to have expected, and quite oppressive to have required, a detailed explanation of the myriad of items recorded in the project reports and time sheets that have been tendered. 1021 I recognise that, because the initial recording of costs by BHP-IT employees involved a manual process, there was scope for error in that non-chargeable time or expenses could have been recorded or that time could have been wrongly recorded. I consider that recording errors were as likely to be wrongly disadvantageous to BHP-IT as they were to be wrongly advantageous, if such errors occurred in any measurable number. For this reason if the project cost inquiry reports do not record with absolute accuracy the actual costs incurred those reports are the best estimate of those costs. And I accept those estimates as being reliable for present purposes. 1022 I should add that if these actual costs include costs incurred on account of the contract, though prior to its execution, they would be recoverable in a claim for wasted expenditure (which is the alternative claim advanced): see Amann Aviation Pty Ltd, at 100; Lloyd v Stanbury [1971] 2 All ER 267. I am in any event not satisfied that the cost inquiry report demonstrates there was pre-contract expenditure. It merely records expenditure in the relevant financial year of BHP-IT without ascribing a time to when it was incurred. 1023 I am satisfied then that in earning Milestones 1000 to 3000, BHP-IT incurred expenses of $706,200 although, importantly, it obtained the sum of $1,700,000 by way of net receipt for those milestones. I am likewise satisfied that BHP-IT incurred expenses of $1,123,844 on account of Milestone 4000 but that that milestone was never achieved and thus never paid for. 1024 BHP-IT's contention is that the actual costs incurred by it were the sum of these two sets of expenses and amounted to $1,830,044. Its September 1994 estimate of the costs it would incur in performing the ADCNET contracts was $2,094,111 and it estimated it would in consequence have earned a return of $1,297,293. The effect of GEC Marconi's repudiation was to have relieved BHP-IT of the need to incur the further expenditure of $264,067 (being the difference between its 1994 costs estimate and the actual costs incurred). Therefore it was entitled to receive by way of damages the sum of $1,830,044 (its actual costs) and $1,297,293 (the return to be earned) minus $264,067 (the costs saved by not having to perform the balance of the Head Contract). 1025 In my view, this claim too readily assumes an important component in what has to be proved. As was said in Amann Aviation Pty Ltd (at 80), when expectation damages are sought: "[t]he onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff's expectation, objectively determined, rather than subjectively ascertained. That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation": emphasis added. 1026 BHP-IT's September 1994 estimate was that its gross profit would be $835,912 producing a net profit before tax of $820,912. A separate estimate was made for contingency and risk for which an allowance of $461,381 was made, this figure being referable (as to $156,686) to BHP-IT's own performance and (as to $304,695) to non BHP-IT costs. 1027 I am satisfied that these estimates were reasonable estimates when made and they continued to be relied upon by BHP-IT for at least certain of its internal purposes up until the Sub-Contract was repudiated, as witness the 1996 quarterly review reports. I should add, though, that I do not regard the actual "estimates" Tables used in those reviews (an example of which I reproduced above) as being particularly helpful for present purposes as they seem to do no more than show the effects of contract variations on the estimates as originally made. They do not, for example, record actual costs incurred though one can infer that, if the known actual costs had diverged so significantly and adversely from the original estimates as to call them into serious question, this would have been reflected in the quarterly reviews. 1028 Accepting the original estimates for profit and for contingency and risk were reasonable, the questions that arise are whether the former (ie for profit) remained reasonable and realistic, and whether the latter (ie for contingency and risk) was likely to have been unnecessary in light of subsequent events. I have already indicated that Mr Hammond conceded (a) that he did not attempt to see whether the Head Contract would have been loss-making or profit-making if GEC Marconi had fully performed; and (b) that it would have been possible for someone within BHP-IT to determine what further work BHP-IT would need to have done with GEC Marconi to achieve Milestones 4000 to 7000. 1029 BHP-IT in its final reply submissions accepts it can still recover its anticipated profits "provided expectation of such profits remained reasonable at the time of repudiation". It then contends GEC Marconi's repudiation made it impossible to establish what its actual profits would have been, therefore the only available evidence would be evidence of anticipated profits and the best evidence of that was the estimate in its 1994 costing for the project. It submits that the reasonableness of that costing is borne out by subsequent events, with only $1,830,044 of the projected cost of $2,094,111 having been incurred notwithstanding that the project had already overrun by ten months. 1030 Save for what I have to say below on contingency and risk, I would have accepted that the net profit figure of $820,912 was one of which there was some likelihood of attainment. In achieving Milestones 1000 to 3000, BHP-IT retained a cash benefit of about $1 million over its expenditure (circa $700,000). It is unsurprising that Mr Brent's Marketing and Operations Report of December 1995 had its optimistic note - "Expenditure is below budget, revenue and profit ahead of budget". 1031 Achieving Milestone 4000 would not have been so bountiful. The evidence suggests that, at best, the outcome would have been a break-even one for costs and receipts for that milestone. Expenses so far incurred on account of that milestone were $1,123,844 while the net payment to be retained by BHP-IT from the Commonwealth's payment on achievement of it was $1,140,000. 1032 There is no explicit evidence of the likely estimated cost of achieving the remaining three milestones, though the effect of BHP-IT's alternate submission is that its figure for the expenditure saved of $264,067 would in large degree provide that estimate. The net receipt BHP-IT would have derived from the payment of the remaining milestones after paying GEC Marconi would have been $551,309. 1033 When Milestone 4000 would have been achieved, BHP-IT would have received 80% of the total Head Contract price. It seems reasonably clear from the Schedule 8 Implementation Plan and from the state of progress the SDP envisaged would have been achieved by the time of Test Readiness Review at that milestone: see "Part I: Non-Payment for Milestone 4000"; that the preponderance of the development work to be performed would have occurred by that stage. 1034 It is also clear that such was not actually the case with the work done under the Sub-Contract. I have referred earlier to the state of the builds. There equally is no doubt that delays had occurred for reasons related both to the non-provision of STUBS and otherwise. The FRS posed its own problems. And there was the on-going dispute. I do not consider it surprising that in the August and November quarterly reviews of the ADCNET project, an overhead indicated that while the "reported status" of the project was 68% complete, the "[a]ctual status is probably 20-40%". Mr Brent confirmed that that was his view at the time. In May of 1996 he had already expressed the view to GEC Marconi that "the overall earned value of the IPD Component … can only be somewhere below 20% complete". 1035 While the costs of the delayed progress would have sounded in claims for liquidated damages (though this had a low ceiling for the total that could be claimed: Schedule 8, cl 2.1) or in a possible common law claim, they would in my view also have had some reflection in BHP-IT's own performance costs. 1036 This brings me to the question of contingency and risk. The 1994 estimate envisaged (not unexpectedly given its purpose) that the allowance for contingency and risk would be expended. BHP-IT's claim here is based on it being entirely unexpended and therefore as constituting a component of the "contribution" it would have received for performing the Head Contract. 1037 I am not satisfied that such would have been the case. And given the supposition in the 1994 estimate of the risk allowance that it would be exhausted, I would have expected evidence to have been given that it had not been called upon at all up until the time of termination if such was the case. The only document of which I am aware which refers to possible use of the allowance is that set out above which relates to additional costs due to the dispute with GEC Marconi as at 10 November 1996 and which suggested that the unexpended provision for risk remaining at that date was only $52,520. This document has not been explained by any witness. And it is only evidence of the accounting adjustments that BHP-IT chose to make for its own purposes. What it does suggest, though, is that BHP-IT was incurring unenvisaged costs in consequence of the dispute with GEC Marconi for which specific provision had not otherwise been made. Unless those costs were recoverable from GEC Marconi - and, as will be seen, BHP-IT has made a significant dispute management claim against GEC Marconi which I reject later in these reasons: see "Dispute Management Costs" - they stood to dilute the contribution BHP-IT could reasonably have expected to have derived from the Sub-Contract's performance. It is on this basis that Commonwealth relies upon this particular document. I will refer separately below to particular submissions made in relation to it by BHP-IT. 1038 Given (a) what I said earlier both about the actual status of the project and about the contractual environment in which BHP-IT was to render its performance, (b) Mr Brent's stated concern that while the "profit position looked good … the risk position did not", and (c) the original estimate that the contingency and risk allowance would be consumed, I am not satisfied that on the balance of probabilities that this allowance would have made any contribution to the profit BHP-IT would have made had the Sub-Contract been performed. In reaching this conclusion, I am estimating that BHP-IT would at least have incurred costs in the order of about $800,000 to have completed the Head Contract. I accept that the Sub-Contract and the Head Contract contained mechanisms that protected BHP-IT from the financial consequences of many of the risks to which it was exposed because of the delayed progress of the project, though as I have indicated, the liquidated damages provision set a low ceiling to the total that could be claimed under it. This said, I consider the figure of $800,000 to be a more than conservative one. 1039 The Sub-Contract was dramatically improvident for GEC Marconi and it posed technical impediments because of the FRS. Even assuming that the contract proceeded to completion using the emulator, it would in my view have remained a challenging one not only for GEC Marconi, but also for BHP-IT. As past performance had shown, GEC Marconi had been and would have been unable to keep to the contract schedule. Delays and negotiations for contract extensions would have remained the hallmarks of the project. Yet the aggregate of liquidated damages payable was 5% of the contract price, although it was open to BHP-IT to claim damages at common law for losses flowing from delays caused by GEC Marconi. 1040 It was inevitable in my view that BHP-IT would have had to absorb some of the costs of delay. I likewise consider that the state of the FRS would have had to be addressed. Management of the contracts to completion would have been more burdensome than was envisaged in the 1994 estimates and that burden would have been reflected in BHP-IT's costs. 1041 Before indicating what I consider would be an appropriate award for profit in the circumstances, I should first refer to the separate submissions made by BHP-IT on how I should treat both risk and the costs associated with the dispute with GEC Marconi prior to BHP-IT's acceptance of the latter's repudiation of the Sub-Contract. The submissions are premised upon the propositions that GEC Marconi had both breached the Sub-Contract from early 1996 and had repudiated it by at least June 1996. The latter submission in particular is consistent with my finding on repudiation: "The Repudiation Claim". It is likewise possible to point to non-compliance with timetable requirements that manifested breaches of the Sub-Contract. It is unnecessary that I identify the latter or that I consider such issues as whether any such breaches had been "waived", etc. 1042 As I understand them, BHP-IT's submissions are, first, that the costs associated with the dispute are losses suffered in consequence of breaches that had occurred up to and including June 1996 and were recoverable as such because the right to claim them had accrued prior to termination; secondly, those losses should thus not be taken into account for risk and contingency purposes with the consequence that I should regard the provision made for risk as unaffected by the dispute costs and I should treat the risk allocation as unexpended notwithstanding the 10 November 1996 document; and, thirdly, in any event, as GEC Marconi repudiated the contract by June 1996, I should assess BHP-IT's damages for expectation loss from that time and at that time the risk allowance was intact and as such should be treated in its entirety as contribution. 1043 These submissions can be dealt with briefly. Later in these reasons I reject BHP-IT's claim for damages for dispute management costs. Those costs in consequence would have diluted the contribution BHP-IT stood to derive from the Sub-Contract's performance, as I have earlier indicated. 1044 As to the submission that BHP-IT's expectation losses should be assessed as at June 1996, I need only note that (i) "[l]oss of bargain damages are recoverable only if the contract is at an end": Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245 at 260; and (ii) "there can be no breach for loss of bargain following repudiation until that repudiation is accepted. Only then is the contract terminated and damages able to be calculated as at that date": Ronnoc Finance v Spectrum Network Systems Ltd (1997) 45 NSWLR 624 at 636. In the present matter the appropriate time to calculate loss of bargain damages is at the time the bargain was lost, ie at the date repudiation was accepted. On its own case BHP-IT could have accepted GEC Marconi's repudiation by at least June 1996. It chose not to do so and incurred unprovided for costs in consequence. The incurring of those costs provides no reason for manufacturing a loss of bargain at an earlier date than when that loss actually occurred. 1045 I turn now to the question of the measure of relief to which BHP-IT is entitled. It has often enough been recognised that difficulties of estimation do not relieve a court of the responsibility to arrive at an assessment of damages: eg Fink v Fink (1947) 74 CLR 127 at 143. In light both of the performance rendered up until the time of repudiation and of the contingencies to which I have referred, I am satisfied that the Head Contract would have remained profitable for BHP-IT and that that profit, while not reaching the level estimated in 1994, would have not fallen significantly short of it. An award for profit of $700,000 would be appropriate in the circumstances. 1046 Subject to the question whether any actual net profit was achieved on its actual performance of the amended Head Contract - and I later find there was not - BHP-IT is entitled to be compensated for the loss of the benefit of the Head Contract in the sum of $2,530,044, that sum being made up of $1,830,044 for wasted expenditure and $700,000 for loss of net profit.
(ii) Costs of Performing the Variation Agreement 1047 The central issue raised by this claim is encapsulated in the statement of principle made by Megarry V-C in Tito v Waddell (No 2) [1997] Ch 106 at 332: "if the plaintiff can establish that his loss consists of or includes the cost of doing work which in breach of contract the defendant has failed to do, then he can recover as damages a sum equivalent to that cost. It is for the plaintiff to establish this: the essential question is what his loss is." Emphasis added. It is no answer to such a claim that, as in the present case, the plaintiff is in turn contractually obliged to do the work the defendant has failed to do. Such is the commonplace, in a claim by a lessee against a sub-lessee for breach of the covenant to repair: see eg Conquest v Ebbetts [1896] AC 490; McGregor on Damages, para 1077ff (16th ed); and, as illustrated in case law in United States jurisdictions, in claims by a head contractor against a sub-contractor on account of the latter's failure to perform, or adequately to perform, the contracted for work: S & D Mechanical Contractors Inc v Enting Water Conditioning Systems Inc 593NE 2d 354 (1991): US v Curtis T Bedwell & Sons Inc 506 F Supp 1324 (1981); see also "Comment Note: Overhead Expense as Recoverable Element of Damages" 3 ALR 3d 689 at [8] (US). However, that the plaintiff may be remunerated in turn for doing that work does bear directly on the question of "what his loss is". 1048 The way BHP-IT put its case originally in submissions was, in effect, as a claim for damages for a form of "lost opportunity to bargain" (cf Sharpe and Waddams, "Damages for Lost Opportunity to Bargain" (1982) 2 OxJLS 290) a realistic commercial price with the Commonwealth for the actual performance it had to render after GEC Marconi's repudiation. As later developed, the claim was put as one for compensation for the actual cost to BHP-IT of being forced by GEC Marconi's repudiation to utilise its own labour and other resources for a long period and with no return, in performing the work GEC Marconi had contracted with it to perform. In its ordinary course of dealings BHP-IT would have expected a return for having to render its services. That lost return in this case - the "opportunity cost" - was a loss suffered by BHP-IT. 1049 While the latter approach avoids the risk of the claim being seen as simply a claim for loss of an opportunity to make a profit of the type exemplified by Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 - a risk GEC Marconi has sought to exploit - the two approaches outlined above are in substance indistinguishable. They both focus on the loss of a reasonable commercial return for the services rendered as an actual cost to BHP-IT. 1050 Put shortly the actual claim is that in having to perform the amended Head Contract at a predetermined price, BHP-IT was unlikely to obtain any return by way of profits or contribution to overheads for the work done. If it had been done in the ordinary course of BHP-IT's commercial dealings (on its usual costs plus basis) it would have been done at a price that incorporated profit and a contribution in the order of $6,798,767. It is this sum, or else a proportion of it (to reflect the suspension decision with 55% of the work completed), that BHP-IT claims as its loss. 1051 While BHP-IT relies upon orthodox principles governing contractual damages to support the loss claimed, it does seek support for the "loss of return" component of the claim from somewhat analogous situations in which such damages are awarded. The first of these relates to cases, illustrated by Hungerfords v Walker (1990) 171 CLR 125, in which damages have been awarded for loss of use of money. The second is where a party has been allowed the reasonable cost of repairs effected by it personally to remedy damage to its own property that was sustained by another's tortious act: Price v Commissioner of Highways [1968] SASR 329 at 332-333; Commonwealth Railways Commissioner v Hodson (1970) 16 FLR 437; Trindade and Cane, The Law of Torts in Australia, 553 (3rd ed). The third and more distant analogy relied upon, again from tortious damages, is that where a person loses the use of a profit-earning asset through the wrong of another. In such a case the aggrieved party is entitled to recover as damages flowing naturally from the wrong, either loss of profits during the period in which the asset is unavailable where there was otherwise a reasonable certainty of their having been earned or else general damages for the loss of such profits which it must reasonably have been anticipated would have ensued during that period: The Argentino (1888) 13 PD 191; affd (1889) 14 App Cas 519; The Hebridean Coast [1961] AC 545 at 562-565; McGregor on Damages, para 1336ff (16th ed); and see also Oldcastle v Guinea Airways Ltd [1956] SASR 325. Finally, BHP-IT it is said, was obliged because of GEC Marconi's wrong to commit substantial resources of its own to performing the Head Contract and thus had to forgo the deployment of those resources on other profitable contracts. It should in consequence be compensated for the loss of such profits. For the purposes of showing there were profit-making opportunities available, it relies upon the evidence of Mr Dart relating to BHP-IT's growth in the period from the end of 1997 to 1999 and to the demand for software development skills in the market place. 1052 In my view there can be no doubt that GEC Marconi's repudiation cast on BHP-IT a burden that was unanticipated and unbargained for by BHP-IT. GEC Marconi was to perform the actual work in question for BHP-IT. It failed to do so. It then had to be done by BHP-IT deploying its own resources for the purpose. As GEC Marconi well understood, BHP-IT contracted with the Commonwealth on one basis (ie the actual work would be performed by a sub-contractor). It was being required to perform on another. Subject to its bringing into account payments received from the Commonwealth for its performance of the amended Head Contract, BHP-IT is entitled to claim as damages its costs in doing the work GEC Marconi failed to do: Tito v Waddell (No 2), at 332. The real issue is whether the costs actually incurred by BHP-IT can properly be said to include a component representing the loss of return (or sacrifice of profit) for doing the work. 1053 The principal way in which BHP-IT now puts its case is premised upon the proposition that a commercial enterprise will not in the ordinary course agree to supply goods or to render services for no return, although on occasion it may be forced to do so. In support of this it draws on the observations of Mason CJ and Dawson J in Amann Aviation Pty Ltd, at 81 that: "In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations." 1054 Having so identified the expectation of a business enterprise, BHP-IT then contends that the sacrifice of profit unavoidably entailed in an activity carried on by a business is a cost associated with the conduct of that business. That is a real and identifiable cost that is measured by the difference between the price charged by the supplier in the particular case and the price necessary to compensate the supplier for the profit it is forced to sacrifice because of the supply: Telecom Corporation of New Zealand v Clear Communications Ltd (1995) 32 IPR 573 at 593-594. In this BHP-IT seeks to pray in aid the economists' conception of "opportunity cost": cf Dart Industries Inc v Décor Corporation Pty Ltd (1993) 179 CLR 101 at 123. BHP-IT thus contends that GEC Marconi's repudiation obliged it to complete the Head Contract itself and in so doing to tie up its own personnel and resources for a lengthy period and for no return. To so use its personnel and resources involved the relevant sacrifice of profit. It is entitled to be compensated for that sacrifice. 1055 BHP-IT enlarged upon this "opportunity cost" claim in supplementary submissions responding to questions I had asked. It noted that the concept of opportunity cost is well recognised in Australasian Law: see Hungerfords v Walker (1990) 171 CLR 125 at 143-4, I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41 (2 October 2002) at para 123; Dart Industries Inc v The Décor Corporation Pty Ltd (1994) 179 CLR 101 at 114 and 123-5; Apand Pty Ltd v Kettle Chip Company Pty Ltd (1999) 162 ALR 505 at 520. 1056 The concept has been applied to the expenditure of funds and to an investment in capital assets. BHP-IT contends there is no reason why it ought not to be applied to the forced deployment of skilled staff to complete a software development project that was the subject of a repudiated obligation owed by a sub-contractor, in circumstances where the expenditure of funds will not otherwise derive any commercial return. There is no logical difference between monies invested in plant and equipment, such as a ship or crane, and monies invested in retaining and deploying skilled software developers. 1057 Despite its allure I am unable to accept the contention as put. I am satisfied that, subject to its bringing to account its receipts from the Commonwealth, BHP-IT is entitled to claim its actual costs in performing the amended Head Contract. Those costs include its direct costs, expenses and charges and, importantly, loss of overheads. It does not include that component of loss of return attributable to loss of profits. The reason for that exclusion is that no presumption, special or default rule entitles BHP-IT to claim such a loss in circumstances such as the present without proof of it. I am not satisfied that BHP-IT has proved it suffered such a loss: cf Sunley (B) & Co Ltd v Cunard White Star Ltd [1940] 1 KB 740 at 747; S & D Mechanical Contractors Inc v Enting Water Conditioning Systems Inc, at 362ff; see also Ellis-Don Ltd v The Parking Authority of Toronto (1978) 28 BLR 98 at 124ff; Keating on Building Contracts, 8-67, 8-68 (7th ed). 1058 I equally am not satisfied that the law has yet developed to the point at which it is open to BHP-IT to make such a generalised claim for "opportunity cost" as it does. No single idea (other than compensating actual losses), let alone a single rule, encompasses the range of circumstances in which, and the bases on which, damages can properly be awarded for what, for convenience I will call, "loss of use of resources or diversion of resources" consequent upon a tort or a breach of contract. To illustrate this obvious point I refer to two common examples. 1059 The first is where a person (a) has used his or her own time (which would not otherwise have been used for profit making purposes) to remedy damage or loss caused by another's tort or breach of contract; or (b) has lost the use of a non-profit earning or a loss-making chattel that has been damaged by another's tort or breach of contract - and then claims damages for that lost time so expended: cf Price v Commissioner of Highways [1968] SASR 399, or for that loss of use: cf The Mediana [1900] AC 113: Nauru Local Government Council v New Zealand Seamen's Industrial Union of Workers, above, at 477 (ll 6-16). Though no loss of return in the nature of a profit could be claimed in such cases, in each instance a compensable loss has been sustained. And in both cases default rules have been employed, as appropriate in the circumstances, to provide recompense for what is recognised to be an actual loss, the monetary expression of which is often difficult to calculate - hence the resort to measures based on rates of hire, labour rates, interest on capital etc: for the variations in relation to loss of use of chattels see generally McGregor on Damages, para 1349(a)ff (16th ed); Waddams, The Law of Damages, 1.2030ff (3rd ed). 1060 The second illustrative case is that in which a loss of profits can so reasonably be anticipated to have ensued from a tort or breach of contract that resort properly be had to some standardised formula to assess that anticipated loss given what was reasonably to be expected in the circumstances in the particular sphere of economic activity in which the alleged loss has been sustained: in the case of shipping, see eg The Argentino (1889) 14 App Cas 524-524 and the explanation of "demurrage" in this context in McGregor on Damages, paras 1336-1337 (16th ed). I would note in passing that the evidence in this case does not throw light upon the nature of the workings of this particular industry or upon the losses that might reasonably be anticipated to have ensued from a breach of contract such as in this case. 1061 What is common to both illustrations is proof that an actual loss has been sustained. They differ significantly in the manner in which, and the bases on which, that loss is translated into a damages award. 1062 BHP-IT cannot be awarded damages to compensate it "for some kind of harm which [it] cannot prove that [it] ever sustained": The Hebridean Coast [1961] AC 545 at 578. The monetary expression of an actual loss or harm suffered may be difficult to estimate where precise evidence is not available: Amann Aviation Pty Ltd, at 83. But the fact of the loss itself is not to be presumed. As was said by the English Court of Appeal in Sunley (B) & Co v Cunard White Star Ltd, at 747, of a claim (inter alia) for loss of profits said to have been occasioned by a breach of contract resulting in delayed delivery of a machine used for income producing purposes: "In [the] circumstances, the plaintiffs really failed to prove any facts on which their damages could be estimated. In the absence of evidence they relied on the law. And the learned judge unfortunately succumbed to the invitation to discuss a variety of cases like The Mediana (I) at great length. Those cases establish that when a plaintiff is deprived of the use of a chattel which he does not use for making profit he is not to be debarred from claiming as damages what during that time its use would have been worth to him, had he not been prevented from using it. But those cases are no authority for the proposition that, if the owner of a profit-earning chattel does not prove the loss he has sustained, the judge may make a guess in the dark and award him some arbitrary sum." 1063 I would note in passing that in the United States where a loss of profits is claimed in consequence of a tort or of a breach of contract, a similar requirement of proof of the loss is imposed: see generally 22 Am Jur 2d "Damages", s624ff. This has been notably so where, as in the present case, the loss claimed was of profits foregone because a head contractor was forced to use its own employees and plant when doing, or supervising the doing of, work which in breach of contract a sub-contractor had failed to do: see eg US v Curtis T Bedwell & Sons Inc 506F Supp 1324 (1981); S & D Mechanical Contractors Inc v Enting Water Conditioning Systems Inc, above. I would, though, acknowledge that the usual requirement in United States jurisdictions that a loss of profits be proved with "reasonable certainty": cf Farnsworth, Contracts, s12.15 (3rd ed); may well impose a more exacting proof than is the case in this country: cf Amann Aviation Pty Ltd, at 83-84. 1064 BHP-IT has not sought in its claim to differentiate for any operative purpose between its alleged loss of overheads and its loss of profit. The claim advanced has been a global one embodying both of these elements. As a matter of principle in a case such as the present, where there is no issue of remoteness: cf Parta Industries Ltd v Canadian Pacific Ltd (1974) 48 DLR (3d) 463; there is probably "no logical distinction to be drawn between a claim for lost profit and a claim for lost overhead:; Ellis-Don Ltd, above, at 127; although, importantly, the loss of each does require separate proof: cf S & D Mechanical Contractors Inc, above, at 362ff. 1065 Considering first the claim for lost profits, for BHP-IT to succeed in its claim it was necessary for it to demonstrate that, but for its having to deploy its labour and resources as it did there was a reasonable likelihood that the profit it claims was thus foregone would have been available to it. The Commonwealth could not have been the source of that profit. The price of the Head Contract had long since been fixed. BHP-IT has not pointed to any particular profit making activity in which there was a "reasonable certainty" of it otherwise deploying its labour and resources: The Hebridean Coast [1961] AC 545 at 562; but which was forsaken because it was required to divert its own resources to correct the problem created by GEC Marconi: S & D Mechanical Contractors Inc, at 363; and which resulted in a "loss of profits which could reasonably be expected to have been derived": Nauru Local Government Council, above, at 477. 1066 Apart from several observations of a most generalised character in the evidence of Mr Dart and Mr Hammond to the effect (a) that the rate of growth of BHP-IT in an eighteen month period between 1997 and 1999 was 40 per cent outside the domain of BHP (ie the parent company) whatever that might have signified; (b) that the period was one of "reasonable buoyancy" for BHP-IT; (c) that there was a strong growth in the IT industry across all sectors; and (d) that there was a substantial demand for software engineers, there was little in the evidence to illuminate in any satisfactory way how profits such as claimed by BHP-IT could reasonably have been earned by it in the then IT market - a market, moreover, the workings and profitability of which has not been the subject of evidence. I do not regard the observations to which I have referred above as assisting in any way in laying the foundation for proof of the loss claimed. 1067 BHP-IT's loss of profits case has not really been advanced (save as a faint alternative) on the basis that its actual loss had to be proved by demonstrating that, in consequence of its diversion of labour and resources, other actual opportunities were foregone. This explains the state of the evidence on this matter. The case, as finally put, was that the loss inhered in having to do GEC Marconi's work without return or contribution. As I have indicated, an alleged loss of profits cannot be assumed. I am not satisfied that it has been proved that this was a loss sustained by BHP-IT. 1068 Turning to the loss of contribution to overheads, I note again that BHP-IT has not sought operatively to distinguish this form of loss from its loss of profits. This said, and subject to any question of recoupment from moneys paid by the Commonwealth, BHP-IT's overhead expenses to the extent that they were reasonable and were properly allocated to its performance of the Head Contract were recoverable by way of damages as an actual cost incurred by BHP-IT: see eg Commonwealth Railways Commissioner v Hodson (1970) 16 FLR 437; see also 22 Am Jur 2d, "Damages", s607; "Comment Note: Overhead Expense as Recoverable Element of Damages", above; Homes By Calkens Inc v Fisher 634 NE 2d 1039 at 1045-1046 (1993). 1069 I accept the evidence (reflected in the 1997 Proposal Approval Form ("PAF") estimate for the labour costs of performing the amended Head Contract), that the expenses incurred by BHP-IT in performing that contract included overhead expenses for which no allowance was able to be made because of the predetermined contract price. I would note in passing that it is Mr Hammond's evidence that BHP-IT's internal margin for recovery of divisional and corporate overheads for the 1997-1998 financial year was 29.2%. The margin to generate profit was 13.6%. 1070 Specific submissions were not made initially by any of the parties (a) on whether or not the separate claim for contribution for overheads could properly be made in its own right and (b) on whether or not the claim made is justifiable in its own terms. And it has not been separately quantified. Again in response to questions asked of the parties, BHP-IT later accepted the propositions (i) that, on the evidence, BHP-IT has been shown to have separate divisional overhead rates for each of its three divisions and a common corporate overhead rate, the former being subject to periodic review and (ii) that this evidence should be regarded as reasonable evidence of what its actual overhead costs were in its contracting activities. BHP-IT then contended that its own rates provided sensible and appropriate basis for proving its overhead costs in any event. 1071 I would have to say that the claim for overheads brings into sharp focus the difficulties with the evidence advanced by BHP-IT in support of its damages claim generally. 1072 The 1999 rework of the 1997 PAF (that was prepared internally by BHP-IT under the shadow of this litigation) purported to give prices that reflected labour costs, risk allowances, and BHP-IT's internal margin for divisional and corporate overheads and for profit. The margin was not disaggregated. For most items to which it was applied it was in the order of 32.9% (approx) and produced an overall contribution of $4,289,084 in a total estimated price of $14, 475,943. 1073 I have held BHP-IT has not proved its loss of profit and, accordingly, the total estimate must be abated to reflect this. Furthermore, the amended Head Contract that BHP-IT proceeded to perform contained work that GEC Marconi never undertook to perform (eg the ER3 software for the message switch). It cannot be required to compensate BHP-IT for losses (if any) on the performance of such work. The cost of that work also has not been disaggregated in the claim made. There is, though, no evidence to suggest it was loss making. 1074 I agree with GEC Marconi's submission that the 1997 reworked PAF is a document to be treated with considerable circumspection. But in the circumstances it does not avail BHP-IT in any event in its claim for actual costs, whether by way of overheads or otherwise. 1075 I have already found that the ADCNET project had, for practical purposes, been abandoned after the September 2000 Suspension Agreement. At that time on BHP-IT's own case, it has incurred performance costs of $5,136,122 but retained payments from the Commonwealth of $6,609,966. Those figures are based on a financial status report prepared by Mr Rentz which is in evidence. They resulted in a net benefit to BHP-IT of $1,469,844. I would note in passing that the figures contain performance costs that were referable to, and payments on account of, CR007 (the Expedited Release 3 ("ER3") amendment). ER3 represented different work agreed to by BHP-IT after the termination of the Sub-Contract. The CR007 amendment was designed to secure to BHP-IT an actual contribution (overheads and profit) of $276,601 on a contract price of $853,891. As I indicate below, it is probably the case that the sum of $1,469,844 contains all or some part of that contribution which BHP-IT would be entitled to retain without bringing it into account for the purposes of this claim. 1076 It is Mr Rentz's evidence that, because the amended Head Contract had to be performed at the original contract price no provision could be made for contribution given his cost estimates to perform at that price. It is likewise his evidence that his September 2000 figure for the actual costs of performance to date was based on records of project costs for labour and materials. In consequence that cost figure did not include any contribution for corporate and divisional overheads. 1077 Mr Hammond's evidence is that not all of the categories of cost referred to both in Mr Rentz's financial status report and in the 1997 reworked PAF would have had a margin for contribution applied to them. Applying Mr Hammond's exclusions to costs listed in the financial status report would lead to the result that actual costs in the order of $700,000 would not have been expected to make any contribution to overheads. 1078 The principal evidence on contribution to overheads was given by Mr Hammond. He accepted that the 49 per cent margin that was at the relevant time applied to base contract prices was applied prospectively as a matter of budgeting by BHP-IT. What he had done in his calculations for the purposes of BHP-IT's loss claims was simply to apply that figure retrospectively to actual costs incurred. He further accepted that in applying a percentage figure to estimated work there might, depending upon the way expenses or receipts varied, be either an under recovery or an over recovery of overheads. He gave the following evidence that related to the period which included that of the Variation Agreement: "Q. Have you gone back to any financial period after December 1996 to determine for yourself what actually happened in relation to the recoupment of corporate and divisional overheads? A. No, I haven't. Q. And you can't, therefore, tell his Honour, do I understand, that contributions from projects other than the ADCNET project did or did not fully recoup to BHP-IT its overhead and divisional expenses? A. No, I cannot. Q. You have just relied, have you, on the fact that there was an estimate which was produced [ie in 1997] and if events turned out as the estimate projected, there would have been an insufficient recovery? A. That's correct." 1079 The actual rates applied to overheads in BHP-IT at the relevant period were 29.2 per cent (being 22 per cent for corporate overheads and 7.2 per cent for divisional overheads). These figures were apparently the products, first, of a review of the company's internal margin conducted in the months prior to December 1997 and, then, of a revision in the 1997-1998 financial year which effected an almost 5 per cent reduction in the percentage for divisional overheads. 1080 As is apparent from the cross-examination of Mr Hammond, BHP-IT has not sought to adduce evidence of its actual overhead costs in the period December 1997-September 2000 that were attributable to performance of the amended Head Contract and which were as such an actual cost incurred in that performance. For my own part, I do not consider a failure to do so as being fatal to BHP-IT's claim. 1081 Notwithstanding that, from year to year, there may in fact have been variously an over-recovery or an under-recovery of the overhead costs for the company as a whole from its various projects, the methodology BHP-IT applied to secure its overheads, the allocation made across projects and the reviews of these made its overhead margins a reasonable and proper basis for estimating the likely overhead costs attributable to work performed by it on a particular project: McCarty Corp v Industrial Scaffolding Inc 413 So 2d 1322 at 1324 (1981). For this reason, though it represents a form of generalised estimation of cost: cf the description of the loss in the Nauru Local Government Council case, above, at 473 (point viii); I am prepared to accept it as an appropriate substitute for the necessarily burdensome and in any event quite inexact proof BHP-IT would otherwise have had to bear of establishing its actual loss on account of overhead contribution foregone on this one of its projects in circumstances such as the present: see generally "Comment Note: Overhead Expense as Recoverable Element of Damages" 3 ALR 3d 689 (US). It is clear on the evidence that it rendered performance for that period on the basis of a costing that made no contribution to overheads and its actual cost figure as at September 2000 likewise took no account of overhead costs. It was appropriate for BHP-IT in the circumstances to rely upon the margin rates it had set for the recoupment of overheads as providing a reasonable basis on which to estimate the likely cost. There was a reasonable certainty that such costs were incurred and I am satisfied in light of BHP-IT's own review and revision of its margin percentages that the overheads margin represented the best reasonably available basis for calculating what those overheads were likely to have been. 1082 Bearing in mind, though, that not all estimated or actual costs were expected to or did produce a return by way of contribution to overheads, the figure for actual costs incurred to September 2002 does not itself provide a reliable base figure to which to apply the overheads percentage. I would reduce that sum by a figure of $700,000 representing costs which, in light of Mr Hammond's evidence, were not expected to be return producing. Applying the 29.2 per cent figure to the actual cost figure so reduced produces a figure for overhead costs of roughly $1,300,000. I do not consider this to be an unlikely sum in the circumstances and find, in consequence, that there was a reasonable likelihood of a loss in that amount having been suffered by BHP-IT. 1083 BHP-IT has, though, received payments from the Commonwealth amounts producing a net benefit to it of $1,469,844. It has, in consequence, been fully recouped for such overhead expenses as I consider it was likely to have incurred and it still retains a net balance of about $170,000. I am not satisfied, though, that that net balance should be brought into account by BHP-IT as profit made on performance of the Head Contract. 1084 Once ER7 was agreed in September 1998 the entire BHP-IT team was, on Mr Rentz's evidence, then devoted to work on ER3 tasks which continued until mid-1999. In February 1999 BHP-IT received a milestone payment of $1,500,000 (for Milestone 3000A). It received a further milestone payment in September 1999 of $2,009,769 (Milestone 3000B) of which $509,769 was attributable to ER3. The projected profit component of the contribution charged in the ER3 contract was over $100,000. With earned value by September 2000 being significantly ahead of actual cost, I am prepared to infer that a sum somewhere near the $170,000 net balance figure I referred to above was likely to represent return by way of profit on the ER3 component of the Head Contract. 1085 In the event then I conclude that BHP-IT recouped from the Commonwealth under the amended Head Contract all of the costs it would otherwise have been able to claim against GEC Marconi. I also conclude that it made no actual profit up to September 2000 in its performance of that contract for which it would have to account in relation to its claim for profits lost when it lost the benefit of the Head Contract. 1086 By a somewhat more circuitous route than that relied upon by GEC Marconi and the Commonwealth, I have arrived at the same conclusion for which they each contended. BHP-IT has not proved it suffered any compensable loss in performing the amended Head Contract.
8 project costs incurred from january-may 1997 1087 The sum claimed here for work done on the project after GEC Marconi's repudiation is $246,607, this sum being made up of costs of $174,902 which were charged to project codes during the relevant period and $71,705 representing the internal margin of 49% applied to the labour component of the costs incurred (ie $146,337). 1088 The costs are said to have been incurred in the early stages of the process of preparing for BHP-IT's own actual performance of the Head Contract. BHP-IT claims that they represent a loss that was the immediate consequence of BHP-IT and the Commonwealth agreeing to complete the ADCNET development following GEC Marconi's repudiation of the Sub-Contract. It was not a loss that was too remote. 1089 For similar reasons to those given above in relation to losses incurred in performing the Variation Agreement, I am satisfied that BHP-IT suffered both the loss represented by the sum of $174,902 and some loss by way of overheads. No attempt has been made separately to quantify those costs, BHP-IT relying instead on the internal margin figure of 49% which includes a component not only for overheads but also for profit, the sum so claimed (limited to labour costs) being $71,705. Again for the reasons I gave above, BHP-IT is not entitled to include a claim for a loss of profit as a head of damages in this manner. I am prepared, though, to award a sum at the overhead margin rate of 29.2 per cent. This results in a figure in the order of $42,500. Damages will be ordered in this sum in addition to the sum of $174,902 giving a total for this head of $217,402.
9 DISPUTE MANAGEMENT COSTS 1090 This claim is for costs and expenses incurred by BHP-IT between June 1996 and 24 December 1997 (the date of the Variation Agreement) in managing and attempting to resolve the dispute in relation to the Sub-Contract and the Head Contract which had arisen in consequence of GEC Marconi's refusing to complete the ADCNET software. There are said to be two phases to the dispute. The first ran from June 1996 until 10 December 1996 (when GEC Marconi repudiated the Sub-Contract) and involved all three parties. The second phase ran thereafter until the execution of the variation agreement and related to the resolution of ongoing issues between the Commonwealth and BHP-IT concerning the performance of the Head Contract. 1091 It is BHP-IT's evidence that a separate ADCNET charge code (entitled "Contractual") was established to track the costs associated with the dispute with GEC Marconi; that only senior members of the project team charged their time to this code; and that the total costs recorded by this code were $1,132,396. This figure was made up of labour costs of $573,625, expenses of $277,625 and overheads and standard margin on labour costs of $281,099. I simply note in passing that some part of these costs and expenses on Mr Hammond's evidence, are referable to the period 24 December 1997 - May 1998. That period post-dates the dispute. 1092 It is Mr Hammond's evidence that but for the dispute, BHP-IT would have been in a position to apply the labour resources it did in incurring these costs to other profit generating activities for the company. Cross-examined on this assertion, the following evidence was given: "Q. Are you aware of any work which was offered to BHP that it wished to do from late 1996 to 1997 that it was unable to do? A. I'm not aware of any specific examples. … Q. Do I understand that so far as you are aware all those jobs BHP were offered in which it thought it commercially appropriate to undertake it completed and earned whatever profit was available to be earned? A. Well, what I mean by "commercially" is where it made commercial sense, obviously, to the extent that we had the capability, the skills and the resources available to us to apply and the particular task or the job made commercial sense, then I would see no reason why we would not proceed with it. Q. But let me be plainer about it, You are not suggesting, are you, that you are actually aware of any instance in late 1996 or 1997 where BHP was offered some work which was commercially attractive and it said to the person offering the work, "Very sorry, we can't do it. We have got some people tied up in dispute management"? A. No, I am not aware of any specific situation. … Q. As I understand what you are telling his Honour, and please correct me if I misunderstand the opinion that you are advancing, you say that the persons who were associated with ADCNET working on dispute management might have been allocated to some other jobs which BHP-IT then had on the books? A. That's correct. There would have been a probability of that. Q. That's not a matter that you have investigated? A. No." He accepted he had no knowledge of additional persons being contracted to do work because BHP-IT personnel had been diverted to dispute management. 1093 A significant proportion of the sums claimed by way of expenses incurred related to legal expenses. No evidence was given of the nature of the legal work performed nor of the extent to which it related in an anticipatory way to this proceeding. 1094 GEC Marconi challenges this claim on two broad grounds. The first relates to the sums charged to the charge code. It contends that the nature of, and actual reason for, these charges are not explained. The second ground of challenge is that BHP-IT has not led any evidence to suggest that the persons charging time to this charge code would otherwise have been engaged in profit or income generating activities were it not for the dispute with GEC Marconi. 1095 In my own view, it must be accepted (though the case law is slender indeed) that management expenses incurred in dealing with or remedying problems created by tortious conduct: eg Tate & Lyle Food and Distribution Ltd v Greater London Council [1982] 1 WLR 149 at 152; Nauru Local Government Council v New Zealand Seamen's Industrial Union of Workers [1986] 1 NZLR 466; or by a breach of contract: Christmas Island Resort Pty Ltd v Geraldton Building Co Pty Ltd (No 4) 277; Keating on Building Contracts, 8-38 (7th ed); can be recovered in a damages award. As was said in the Tate & Lyle case (at 152): "the expenditure of managerial time in remedying an actionable wrong done to a trading concern can properly form the subject matter of a head of special damage." 1096 In the very few instances of which I am aware in which claims for such expenses have been made, the principal difficulties encountered had been ones of causation and of proof of the loss actually suffered: see eg Tate & Lyle, above; Christmas Island Resort Pty Ltd, above. In the Nauru Council case in a tort claim against a maritime union for inducing a breach of contract which resulted in a ship not being able to be used for over 100 days, and in which management time was expended in dealing with the resultant problems created (especially in relation to the release of the ship), the proof problem appears to have been overcome by the award of general damages that represented a proportionate part of the administration and general overhead expenses referable to the vessel and for the period: see [1986] 1 NZLR 466 at 472 (ll 15-20), 473 (viii), 477 (ll 35-38). 1097 In the present matter, I am satisfied that BHP-IT incurred management costs and expenses in consequence of GEC Marconi's repudiation of the Sub-Contract. For accounting purposes BHP-IT created a charge code for costs it contends were referable to its dispute with GEC Marconi. The costs recorded against the charge code are advanced as representing its loss. 1098 The difficulty I have with this is that while BHP-IT may, for its own book-keeping purposes, have been able so to assign a cost to its management of the GEC Marconi dispute and its aftermath it has not by so doing proved that it has thereby suffered an actual loss. To the extent that Mr Hammond's evidence has been relied upon to provide the nexus between cost incurred and loss suffered, it has been unavailing. 1099 Despite objection, I admitted Mr Hammond's evidence that the labour resources committed to dispute management would otherwise have been able to be deployed in other profit generating activities of the company. I am satisfied that this amounted to no more than a speculative assertion on his part, as his cross-examination revealed. He was not a witness who could give the evidence needed to translate these costs into a recoverable loss. 1100 There is no evidence to suggest that BHP-IT would not still have employed the persons whose labour costs were charged to the relevant code over the period in question. There is no evidence that "other remunerative work would have been undertaken by any one of the persons concerned if they had been free to undertake such work, nor what remuneration would have been derived … as a consequence of then having undertaken that work": Christmas Island Resort Pty Ltd v Geraldton Building Co Pty Ltd (No 4) (1995) 16 WAR 277 at 280. There is no evidence indicating (a) disturbance to the trading activities of BHP-IT cf Tate & Lyle, at 152; (b) consequential effects on the performance of other contracts; or (c) any need otherwise to engage staff because of the use of personnel on dispute management. This is not a matter in which a loss is to be, or can be, presumed. 1101 Likewise, in relation to the costs and expenses claimed, I am not prepared to infer, without explanation of their actual character and purpose, that those costs and expenses properly can be characterised as a loss flowing from GEC Marconi's breach of the Sub-Contract. I make this comment in particular of the costs said to be referable to "legal expenses". These costs are not said to have been incurred on account of possible proceedings by the Commonwealth against BHP-IT in consequence of GEC Marconi's repudiation. Such costs, arguably, would be recoverable (subject to considerations of remoteness): cf Hammond v Bussey (1888) 20 QBD 79; McGregor on Damages, paras 768-772 (16th ed). No evidence has been given of the reason these costs were incurred, the nature of the legal work performed, the connection between that work and GEC Marconi's repudiation or the possible extent to which it was done in anticipation of this proceeding. 1102 In my view, given the particular nature of this particular head of damage, I consider the creation of the separate charge code is only the first step in proof of the loss claimed. Given the basis on which BHP-IT has advanced this claim, and the manner in which it has calculated its "loss", there is no foundation for an award of damages under this head: cf Tate & Lyle, at 152.
10 MONEYS OWING FOR PERSONNEL PROVIDED 1103 This is a claim for $489,684 by way of charges for the services of BHP-IT personnel provided to GEC Marconi under the Sub-Contract.
(a) Background Setting 1104 In accordance with cl 19A.1 of the Sub-Contract and cl 9.1 of Schedule 6, BHP-IT provided GEC Marconi with certain members of its own staff to undertake work pursuant to the Sub-Contract. These persons were described in the Sub-Contract as "Customer's Specified Personnel". Table 6.2 of Schedule 6 specified the period for which each such person was to be provided to GEC Marconi. 1105 Clause 12.1 of Schedule 6 stipulated, in part, that: "Where it is necessary for the Customer's personnel to work outside normal hours at the Contractor's request or in the case of the Customer's Specified Personnel for a period greater than that specified in Table 6.2, the Customer shall be entitled to charge the Contractor for such services. For those personnel specified in Table 6.2 the charges shall be in accordance with the time and materials rate specified in Table 6.2. Such charges would be deducted from the next invoice payable by the Customer and be substantiated by details on the personnel undertaking the work and the hours worked." 1106 The documentary evidence relating to this matter commenced on 13 February 1996. Mr Brent had sometime previously turned his mind to the question of CSI personnel and the length of time they had worked for GEC Marconi. His letter to Mr Wishart of that date enclosed spreadsheets which he said indicated that most BHP-IT personnel had worked in excess of the contracted commitment. It went on: "Days worked in excess of the contracted number of days are chargeable at the rates defined in schedule 6. Accordingly, I would appreciate it if you would: - check the enclosed spreadsheet and advise me of any perceived discrepancies; - indicate whether you require any of the BHP IT personnel to continue working on the EASAMS team; - confirm the amounts owing to BHP IT at the contracted rates stated in schedule 6." 1107 Mr Goldsmith replied to this on 11 March 1996. He indicated that a number of errors had been found in the hours claimed for BHP-IT staff. He then contended that every time a contract extension had been approved, it was reasonable to expect that the hours to be provided under the contract by BHP-IT staff should have been extended at no cost to GEC Marconi. The letter concluded with the following: "In the meantime, EASAMS considers that since a number of the BHPIT staff engaged on the IPD project are occupying key positions, BHPIT should not change their assignments in order to minimise the impact of the changes currently under negotiation." 1108 On 14 March Mr Brent replied rejecting outright the contention that contract amendments had the effect of amending the number of contracted days for customer personnel. The letter continued: "Any hours in excess of the contracted obligation are chargeable to EASAMS at rates specified in the contract at schedule 9 table 6.2. Services have been rendered, payment is now due. The final paragraph of Reference B states that BHP IT should not change the assignments of its staff on the EASAMS IPD team in view of possible impact on the ADCNET project. Continuing deployment of BHP IT staff on the EASAMS team depends on EASAMS ability to pay for services rendered in excess of the contracted number of days. In the context I require thirty days notice to discontinue the deployment of BHP IT staff on the EASAMS IPD team, should you decide that the services of BHP IT staff are no longer required." 1109 On 22 March 1996 BHP-IT invoiced GEC Marconi in the sum of $157,036.81 an account of excess time worked for the period 25 August 1994 to 11 February 1996. I note in passing this period predates the commencement of the sequence of correspondence to which I am referring. 1110 Mr Goldsmith replied on 26 March 1996 to Mr Brent's letters of 14 ("Ref A") and 22 March ("Ref B"). That letter stated: "In response to reference 'A', EASAMS has reviewed the Contract requirements for the supply of Customer Personnel and confirms your findings that specific customer personnel, some by name, are required to be provided for varying specified periods. I also note the provisions regarding any shortfall by the Customer in the supply for such personnel. Other than these obligations, the Customer has no requirement to provide additional personnel or personnel for extended periods and the Contractor has no right to expect such provision. Further, I am unable to locate any request under the Contract by EASAMS for the provision by BHP IT of additional Customer Personnel services and the conditions of such supply. It is reasonable to expect that failing such a request BHP IT would withdraw its Customer Personnel once its obligations under the Contract were complete unless it was to BHP IT's benefit to continue such provision absent any agreement as to compensation, if any, by EASAMS. In view of the above and the concerns expressed in Reference 'A', please insure EASAMS is given reasonable notice of BHP IT's intention to withdraw Customer personnel where the Contract requirements have been met, so that EASAMS can make suitable alternative arrangements without further jeopardising the Project schedule. Further, the invoice submitted under cover of Reference 'B' is inappropriate and is therefore rejected." 1111 A letter of 16 April from Mr Sharp to Mr Haddad linked customer personnel to the non-provision of STUBS. The letter stated in part: "The purpose of this letter is to inform you that "Customers Personnel", both specified and non-specified, are largely unable to undertake work in respect of this contract in accordance with the contract, the fundamental reason being that by reason of the breaches by BHP IT in not supplying Stubs, EASAMS is unable to properly advance the contract. EASAMS is aware of its obligations to take reasonable steps to minimise damage flowing by reason of the breaches of contract by BHP IT. Accordingly we hereby give, so far as it is relevant and/or needed, our consent for Customers Personnel, both specified and non-specified, to be absent from undertaking work in respect of this contract - refer Clause 19A.4 of the agreement. Would you please contact me upon receipt of this letter to discuss suitable arrangements for the redeployment of Customers Personnel from this Contract." The letter went on to dispute BHP-IT's entitlement to charge for the provision of services by customer personnel. It relied both on alleged delays caused by BHP-IT and on the lack of a request from GEC Marconi. It also pointed out that Mr Brent's "30 day notice" requirement had no foundation in the contract. 1112 On 30 May Mr Brent wrote to his superior in BHP-IT, Mr Higginbotham. That letter was in the following terms: "I have indicated in previous correspondence that BHP IT are incurring costs through continued deployment of BHP IT personnel on the project. Our contractual obligation vis-ŕ-vis EASAMS in this respect is complete and we have been invoicing EASAMS for use of our personnel in excess of the contracted obligation. This is specifically provided for under schedule 6 of our contract with EASAMS. EASAMS are disputing liability for these costs although they have indicated that their preference would be if we continued to deploy our personnel on the project. In the current circumstances withdrawal of our personnel at this juncture would seriously impact the viability of the project now and in the future. Further representations by Margaret Beattie have elicited the request from EASAMS to remove our personnel and DFAT personnel from the project. In my view we need to continue to deploy our people on the project in the short term as an "insurance policy" but we cannot do it indefinitely. Hence the reason for my concern that we resolve the matter more quickly. Where possible I will re-deploy personnel to other projects in consultation with Andy Weatherhead. If you have any concerns regarding this issue, please let me know.": Emphasis added. 1113 Between March and November 1996 BHP-IT issued eight invoices for charges for customer's personnel. The total sum ultimately claimed, but not paid, was $489,684. 1114 Mr Brent's evidence in cross-examination was to the effect that (i) he did not turn his attention to charging for customer personnel until early 1996; (ii) there had not to his knowledge been any actual request by GEC Marconi that the CSI personnel stay beyond their nominated periods, but he thought he implied a request from their continuing to work beyond the stipulated period, and he did not ask about a request; (iii) he accepted that by March 1996 there was a problem with timely performance of the contract and that if staff were taken away that problem might become a greater difficulty; (iv) if GEC Marconi said that the customer personnel were to be taken away he would cease to be entitled to raise invoices; (v) he accepted that by April 1996 he appreciated it would have been quite inappropriate to raise further invoices for CSI personnel and he added "we probably should have withdrawn our people and we didn't"; (vi) by the time of his letter to Mr Higginbotham he had decided to let people remain with GEC Marconi; (vii) he continued to render invoices because "[o]ur people were delivering work value to the EASAMS team … and, therefore, in the sense of services having been rendered and accepted, I felt that invoicing was a reasonable thing to do"; and (viii) he acknowledged that by mid-1996 there was no longer any implied request to extend CSI personnel.
(b) Submissions and Conclusions 1115 BHP-IT's claim for the entirety of the sums invoiced is based upon GEC Marconi's letter of 11 March in which Mr Goldsmith stated that while delay claim negotiations were outstanding BHP-IT should not change the assignment of its staff as they "are occupying key positions". It goes on to assert that at no time subsequently did GEC Marconi indicate it wanted those "key members" removed and, on the contrary, GEC Marconi continued to utilise these staff. 1116 GEC Marconi's contention is that BHP-IT has simply not proved that its personnel worked for an extended period at GEC Marconi's request nor has it proved that its personnel in fact worked outside the contracted period. 1117 BHP-IT's claim as pleaded is founded directly upon the provisions of the Sub-Contract and, in particular, upon cl 12.1 of Schedule 6. I emphasise this for the following reasons. It has not been suggested that the parties by their conduct had effected a variation to the Sub-Contract and to Schedule 6 to remove any of the stipulated requirements relating to extending the time and/or charging for CSI personnel. It has not been suggested that BHP-IT can rely upon an estoppel to prevent GEC Marconi insisting on its strict legal rights. And it has not been suggested that BHP-IT's claim could be brought in some fashion on restitutionary grounds. 1118 For my own part, I am satisfied that BHP-IT has not made out its claim for payment. My reasons for this conclusion are as follows. 1119 It is reasonable to infer that at the time Mr Brent first turned his mind in early February 1996 to charging for CSI personnel, neither party had given explicit consideration to how the Sub-Contract regulated this dimension of what they had been doing. It is equally reasonable to infer that as, first, Mr Brent and, then, Mr Goldsmith awakened to the possible contractual implications of what they had been doing in relation to customer personnel, their respective appreciations of what the Sub-Contract and Schedule G in fact required were slow in coming. 1120 Mr Brent's 11 February letter appears to have proceeded on the premise that days worked in excess of the contractual commitment were chargeable as of right. The same view was reiterated in his 14 March letter. Mr Goldsmith seems only to have turned his mind to the contractual requirements in mid-March and, in light of that he raised the issue of there being no request to provide additional customer personnel services. 1121 Mr Brent acknowledged that no actual request for the provision of customer personnel services had ever been made. He did say, though, that he thought he implied a request from the fact that BHP-IT's continued working beyond their specified periods. Consistent with the view I have taken of Mr Brent's oral evidence, I do not consider it would be safe to rely upon this recollection as representing any view he entertained at the time. His conduct was, in my view, consistent with the view he accepted he later entertained when continuing to invoice GEC Marconi ie if the work was done and accepted it should be paid for. And he accepted in any event that by mid-1996 there was no longer any implied request. 1122 Once the need for a request was squarely raised by Mr Goldsmith in his 26 March letter - and it was reiterated subsequently by Mr Sharp in his 16 April letter - any possible basis for a claim thereafter based on cl 12.1 of Schedule 6 evaporated (if it had existed at all previously). Mr Goldsmith's 26 March letter acknowledged that BHP-IT might consider it to be to its benefit to continue to provide personnel without compensation from GEC Marconi, otherwise it was reasonable to expect BHP-IT to withdraw its personnel. BHP-IT's conduct thereafter was consistent with its acting on the assumption that it was in its interests not to withdraw its personnel - as witness the emphasised statements in the 30 May letter to Mr Higginbotham, above. In the face of the stand being taken by GEC Marconi, it continued to provide services at its own risk. It had no automatic entitlement to be compensated for the services it chose to continue to render. There had been no contract variation dispensing with the request requirement and no submission has been made to the contrary. 1123 BHP-IT has sought to circumvent this conclusion by relying upon Mr Goldsmith's first (ie 11 March) reply to Mr Brent in the sequence of correspondence I have set out above. In that letter, having attempted to link the CSI personnel issue to contract extensions (including from delay claims), Mr Goldsmith made the observation which I here repeat: "EASAMS cannot confirm the amounts owing to BHPIT or the hours still due to EASAMS from BHPIT until all claims for delay have been resolved. In the meantime, EASAMS considers that since a number of the BHPIT staff engaged on the IPD project are occupying key positions, BHPIT should not change their assignments in order to minimise the impact of the changes currently under negotiation": emphasis added. 1124 This letter may properly be able to be interpreted as embodying a request to continue to supply personnel (whether or not this would involve an extension of time) because of the delay claim negotiations. The difficulty BHP-IT has in relying upon such a request is that it rejected outright the premise of it (ie the link to the delay claims). And, in its 14 March letter, it adhered to the view Mr Brent had espoused in his 11 February letter: excess hours were chargeable to GEC Marconi and, as the services had been rendered, payment was due. 1125 There is, in my view, no evidentiary foundation at all for the claim pleaded and prosecuted by BHP-IT. I agree entirely with GEC Marconi's submission in this regard. I express no view on whether a differently framed claim may have fared better.
11 LOSS OF USE OF MONEYS 1126 This claim is a variant on that mandated by Hungerfords v Walker (1989) 171 CLR 125; see also Bank of America Canada v Clarica Trust Co (2002) 211 DLR (4th) 385; Jacobs, Damages in a Commercial Context, Ch 16. Put shortly, BHP-IT claims $2,457,413.83 as the cost to it of being deprived of money either withheld from it by GEC Marconi in breach of contract or paid away by it in consequence of GEC Marconi's breach. The cost claimed was based on BHP's "Weighted Average Cost of Capital" ("WACC"), being a varying percentage which the parent company, BHP, required each dollar of capital deployed by it or its subsidiaries (including BHP-IT) to return and which represented what was said to be the cost of capital to BHP. The WACC varied between 12.5% and 9% over the period of this claim. 1127 The breakdown of the WACC claim and the "losses" in respect of which the claims are made can be represented in tabular form as follows:
1128 As I understand it, the claim as finally put is that, if BHP-IT were to have invested the moneys so expended by it or withheld from it, it would have been by way of intercompany loan to its parent BHP at the intercompany rate of interest. 1129 There is a short answer to almost all of the claim. Save in relation to the second of the above categories, the losses upon which the WACC has been claimed are simply not losses I have found were sustained by BHP-IT. I would note, though, that the loss referred to in the fifth category above ("T & M Services") relates in fact to a claim by BHP-IT that has been accepted by the Commonwealth for non-payment for work performed. I would also note that the first category of loss could be recast in a different sum to represent the loss I have found flowed from the lost benefit of the original Head Contract. 1130 The basic difficulty with the claim, to the extent that it can be related to losses actually sustained, lies in the way in which it is advanced. The particular loss claimed is, in my view, a contrived one which, moreover, is measured in substance by its impact, not on BHP-IT, but upon its parent, BHP. 1131 Mr Hammond of BHP-IT gave the evidence upon which this claim is based. In his witness statement he described the WACC and its purpose in the following way: "BHP sources its capital from two (2) sources, equity and debt providers. Both providers require a return for the provision of such capital and the risk taken. The delivery of these returns by BHP's businesses to the equity and debt providers is the "cost of capital" to BHP. The level of equity used by BHP relative to the level of debt (usually referred to as gearing) will determine the weighted average cost of capital ("WACC"). By "equity used" I mean shareholders funds as reported in the Balance Sheet of BHP. BHP requires that each dollar of capital deployed must return the cost of that capital as an absolute minimum. The rate of the weighted average cost of capital was determined by BHP annually. This rate was then published to BHP and all of its subsidiaries including BHP-IT." 1132 In cross-examination he accepted that (i) the cost of equity was not an actual cost to a company other than in terms of "the longevity of the company" and it was not a figure recorded in BHP-IT's accounts; (ii) he looked at the WACC from the perspective of BHP and had not done any calculation of the WACC of BHP-IT; and (iii) when it was suggested that the WACC figure had nothing at all to do with any cost which was in fact incurred by BHP-IT, he replied that "[t]he way I've presented this is really the impact on BHP". 1133 In cross-examination he explained the circumstances in which "in the ordinary course of [his] professional life" he would customarily use the WACC. He said: "A. The weighted average cost of capital is something that would be used in the company to evaluate investments, capital expenditure programs, et cetera, and, indeed, would also be a benchmark figure for key performance criteria for the businesses in terms of their own returns and ensuring that the businesses financial performance were sufficient to recover the corporations cost of capital." 1134 Importantly, he indicated that BHP ran a central treasury. Whenever BHP-IT had cash reserves these were automatically transferred to BHP accounts by way of intercompany loan at the prevailing intercompany rate. It was the central treasury that effected borrowings in the market. BHP-IT did not have any debt funding arrangements in place. He also suggested that, if BHP-IT had the use of the moneys it claims as losses, it would have had that use prior to BHP-IT's sale in 2000 and so it "lost the opportunity of being able to reinvest that in other BHP-IT projects". 1135 GEC Marconi has submitted that the WACC cannot be regarded as a comparable loss to BHP-IT whatever its significance may have been for BHP. I agree with this submission. The WACC was imposed on the BHP group for the apparent benefit of BHP. It does not reflect the weighted average cost of capital to BHP-IT. The evidence is that, if BHP-IT had cash reserves, these passed automatically to central treasury, BHP-IT having, it would seem, no discretion in the matter. This "investment" was recorded as a loan at the inter-company loan rate. I put to one side, for the moment, the issue whether that rate was the WACC rate. The point to be made is that I do not consider that BHP-IT has suffered an opportunity cost on its loss of use of moneys in the Hungerford sense. BHP has imposed its desiderata on BHP-IT as to the return it should make on its monies. I do not accept that a failure to earn that return can be said as of course to reflect a loss at that rate by BHP-IT. Vis-ŕ-vis BHP-IT the WACC rate is an artificial figure. The matter is not advanced by suggesting that BHP-IT was deprived of the "opportunity to invest in other BHP projects". The evidence relating to BHP's central treasury system does not suggest that this was an opportunity of BHP-IT as distinct from that of BHP. 1136 Finally, I would note that, insofar as I have been invited to infer that the inter-company interest rate was set at the WACC rate, I am not prepared to do so. Mr Hammond's evidence on that rate so far as it went is contained in the following passage of cross-examination: "Q. So if BHP-IT had received this money it would have made a loan to BHP parent company? A. Correct. Q. That would have been your decision, would it, or someone else's decision? A. No, that was an automatic process that was in place within BHP. Q. So whenever there were cash reserves within BHP-IT, there would be an automatic deposit of those funds into the bank account or bank accounts of the BHP parent? A. Correct. Q. Who then paid some interest rate on those funds, presumably? A. There would have been an intercompany interest rate. Q. That intercompany interest rate is something which is recorded from time to time on documents which are business records of BHP-IT, is it? A. Yes, that's correct." I was not taken to any business record of BHP-IT which betrayed what that interest rate might be. Even if it was a requirement of BHP-IT that "each dollar of capital deployed must return the cost of that capital as an absolute minimum", and even if the WACC was "customarily used" in the way Mr Hammond described (see above), this would not satisfy me that the inference that I am asked to draw was the most probable deduction which may reasonably be drawn from the established facts: Holloway v McFeeters (1956) 94 CLR 470 at 477. 1137 I reject the claim made under this head. BHP-IT has, though, foreshadowed an application for statutory interest up to judgment under s 51A of the Federal Court of Australia Act 1976 (Cth).
12 third party liability costs 1138 This claim is based upon the premise that, to the extent that the Commonwealth is entitled to recover any damages from BHP-IT in this proceeding, BHP-IT's liability will have arisen as a direct consequence of GEC Marconi's failure to perform the Sub-Contract. Those damages in consequence are recoverable from GEC Marconi. 1139 The damages I have found relate as, will be seen, (a) to additional project management costs incurred and (b) to the Commonwealth's losses flowing from the need to relocate BHP-IT's project team to the Edmund Barton Building and then, until December 1997, the R G Casey Building. BHP-IT is entitled to recover these costs from GEC Marconi.
15 CONCLUSION ON DAMAGES 1172 I have found that BHP-IT is entitled to an award of damages under the following heads and in the amounts indicated: (i) lost benefit of the Head Contract - $2,530,044 (ii) project costs incurred from January -May 1997 - $217,402 (iii) third party liability costs - still to be calculated.
(1) Introduction 1173 The cross-claim BHP-IT brings against the Commonwealth has an essentially defensive rationale. If BHP-IT is found liable to GEC Marconi for breach of the Sub-Contract, it seeks in its cross-claim to pass on to the Commonwealth the burden of any damages awarded against it. The cross-claim has three independent foundations - breach of contract, contravention of s 52 of the Trade Practices Act 1974 (Cth) ("the TP Act") and negligent misrepresentation - although the damages claimed in respect of each of these are identical. 1174 While the purpose of the cross-claim may have been defensive, the manner in which it has been formulated in each of its above three manifestations is such that, formally at least, those claims are not wholly contingent upon BHP-IT being found liable to GEC Marconi. This creates a state of affairs which, I venture, was unanticipated when the cross-claim was made. Account of it has not been taken in the relief sought. The most that BHP-IT can say of its position is that, even if it is successful against GEC Marconi, it may still be able to recover from the Commonwealth losses which resulted from its dispute with GEC Marconi but which it could not recover from GEC Marconi (by reason of the damages ceiling or otherwise). Beyond this it says that, without the benefit of my findings, it is not possible to identify with further precision the circumstances in which its cross-claim would still have an operation in the event that it succeeds against GEC Marconi. 1175 The course I intend to take in light of my findings and conclusions on GEC Marconi's claim and BHP-IT's first cross-claim, is to consider only the issue of liability in this cross-claim. It does not appear from what has been put so far in submissions that my assessment of damages would serve any useful purpose. If this cross-claim has remaining independent life, the losses so far suggested that may be able to be recovered under it arise out of unrecovered losses sustained in the BHP-IT - GEC Marconi dispute. 1176 One major part of the cross-claim relates to whether the Commonwealth and BHP-IT were in breach, respectively, of the Head Contract and of the Sub-Contract (a) in failing to provide STUBS and (b) in not paying for Milestone 4000. I have already dealt with these matters as they relate to the Sub-Contract. I need only indicate that my conclusions there are similarly applicable to the Head Contact as well. 1177 To put the matter generally but somewhat inaccurately, the balance of the cross-claim relates to the circumstances leading up to the cancellation of STUBS and to alleged misrepresentations and non-disclosures made by the Commonwealth to BHP-IT concerning both its intention to provide STUBS and the reasons for its cancelling STUBS. 1178 As I have indicated the cross-claim is advanced, variously, as a claim for breach of contract, for contravention of s 52 of the TP Act, and for negligent misrepresentation. I will describe these briefly. The breach of contract claim, it is contended, resulted from the failure of DFAT to keep BHP-IT fully and accurately informed about STUBS and about DFAT's increasingly firm intention from early 1995 to abandon STUBS. BHP-IT was in consequence led to adopt an approach to the non-supply of STUBS and to the negotiation of the Emulation Variation Agreement in November 1995 which was quite different from the approach it would have adopted had it been aware that the cancellation and the circumstances leading to it had been engineered. 1179 The TP Act and negligent misrepresentation claims are founded on common facts. BHP-IT contends that from the date of execution of the Head Contract until mid-September 1995, the Commonwealth represented to BHP-IT that it was willing and able to supply STUBS as CSI and would purchase STUBS from AWADI for the purpose. When the Commonwealth informed BHP-IT that it had cancelled STUBS in September 1995 it represented that it had done so through no fault of its own but as a consequence of the conduct of AWADI. The above representations were false and were never remedied. Equally they were made in circumstances in which a duty of care was owed to BHP-IT. BHP-IT acted in reliance upon them. I should add in relation to the tort claim that, in light of the conclusion at which I have arrived on the contract claim, I do not intend to consider, in the alternative, whether a duty of care was owed to BHP-IT.
The principal actors and bodies 1180 Before turning to the general factual setting of these claims I should refer to the principal actors and bodies involved in the events to be narrated. The cross-claim focuses primarily on the decisions and actions, first, of officers and committees in DFAT and to a lesser extent of the Department of Defence ("DoD") and, secondly, of AWADI. Dealing first with DFAT, Les Cook apart, the relevant officers were - (i) Robert Nichols, who was an officer in the IT Branch who assisted Les Cook and who conducted negotiations with AWADI for the proposed procurement of STUBS; (ii) Anthony Skinner, who was an Assistant Secretary and head of the IT Branch which was responsible for the ADCNET project; (iii) Geoff Allen, who was an Assistant Secretary and head of the Diplomatic Security and Countermeasures Branch of DFAT, this branch being responsible for the computer security requirements of the Department; (iv) Robert Cotton, who was the First Assistant Secretary of the Corporate Services Division of the Department and the person to whom Mr Skinner reported; and (v) Clive (Kim) Jones, who was Deputy Secretary of DFAT who had oversight responsibility for three Divisions of the Department including Mr Cotton's and the person to whom Mr Cotton reported. The relevant DFAT committees for present purposes were: (a) the Senior Executive ("the SE") - a body made up of the Secretary and Deputy Secretary of the Department; (b) the Systems Policy Committee ("the SPC") - a committee chaired by Mr Cotton (or by Kim Jones when he attended) that had the oversight of strategic policy directions concerning information technology, which had Department-wide membership and which made recommendations (where appropriate) to the SE; (c) the IT Executive - a body formed by Kim Jones to keep him informed on IT related issues facing the Department, and at the meetings of which Les Cook was a regular attendee; and (d) the ADCNET Security Sub-Committee - a committee chaired by Mr Allen and the membership of which included Mr Skinner, Les Cook and DSD (see below) representatives. 1181 Within the DoD, which was also considering procuring STUBS, there were two units of present significance. The first was the Defence Signals Directorate ("DSD"). This was the national authority responsible for signals intelligence and information security. Its functions included providing information security products and services to the Australian Government. It was the body that evaluated security devices and made recommendations on their acquisition. The second DoD unit to be noted was the Defence Science and Technology Organisation ("DSTO"). Its role was to ensure the expert and innovative application of science and technology to Australia's defence.
Matters of weight and credit 1182 A sharp attack has been made by BHP-IT on the credit of Les Cook and on the weight to be attributed to the evidence of most of the principal Commonwealth witnesses. 1183 Before referring to specific individuals I should say that, in relation to the cross-claim as in relation to GEC Marconi's claim, I had derived little assistance from the oral and much of the written evidence of most of the witnesses, be they for the Commonwealth or, in Mr Brent's case, for BHP-IT. The reason for this is that most demonstrated little, if any, useful recall of events and conversations that are said to be germane to the cross-claim. Given the lapse of time since the events in question this is unsurprising. That lack of recall, though, has had two consequences. First, it has fostered significant attempts at reconstruction from documentation - a phenomenon that has left witnesses sadly exposed to obvious inaccuracy in the face of conflicting documentary material. Les Cook was a victim of this. Secondly, the lack of recall led some number of witnesses to state forthrightly that they had no recall of the matters about which they were being questioned. This has led to the predictable, but not necessarily inappropriate, submissions (a) that lack of recall has been used as a refuge to deflect questioning and (b) that clear recall when other matters have not been recalled, demonstrated reconstruction or recent invention. 1184 My concern about the selectivity of recall and about the prevalence of reconstruction in this part of this proceeding has accentuated my general view that the oral evidence of some number of the witnesses on matters of detail - I instance principally Mr Cook, Mr Brent and Mr Skinner - ought not be treated as reliable in the absence of support from contemporary documentary evidence. 1185 I turn now to particular witnesses. First Les Cook. I do not regard his evidence as reliable save when I expressly indicate to the contrary. It was marked by a high degree of reconstruction - and he did concede he had reconstructed portions of his witness statement. My problems with his evidence were exaggerated by his tendency to be argumentative (on occasion to the point of being counter-suggestive) and by his regular and manipulative advocacy for his own point of view. The latter quality is on display in documents he prepared relating to STUBS. While I acquit Mr Cook of deliberate dishonesty in some of the evidence he gave, his advocacy and his argumentativeness resulted in his giving evidence that was on occasion misleading. 1186 Mr Skinner's oral evidence reflected the problems of lack of recall and selective memory to which I referred above. Instances of the latter tended to be partisan in character and dubious in quality. While not suggesting that he resorted to untruth, I nonetheless do not regard his evidence as reliable. 1187 Kim Jones' evidence was strongly marked by a lack of recall of events, meetings, etc. While he clearly participated in significant discussions in May-July 1995 concerning STUBS, I am not surprised at his lack of memory of these. Though formally responsible for that area of DFAT engaged in the ADCNET project - and he was the Department's signatory to the Head Contract with BHP-IT - his involvement in the matter was particular and strategic. It reflected the hierarchical structure and delegation of responsibilities then characteristic of the Australian Public Service. His departmental role and the diversity of his responsibilities in an administrative structure of this type go far to explaining his lack of memory. As can be the case in other types of position, forgetting what it is no longer necessary to remember can be a positive attribute. This said, I do not consider that his oral evidence added to the documents tendered in this matter. 1188 The one general comment I would make about the evidence of DFAT officers - and it is reflected in responses given by most of them to questions of mine - is that they betrayed a lack of understanding of the ADCNET contracts and of their significance. The ADCNET project and the interests of DFAT, rather than the ADCNET contract and their responsibilities under it, seem to have been their principal preoccupation. I was left wondering on a number of occasions whether, on the Department's side, anyone was actually managing the contract as such and was attentive to its demands. It is Kim Jones' evidence that this contract was an early and the biggest IT contract that by then had been done by DFAT. The evidence in this proceeding clearly reflected inexperience in contract management.
(2) Factual Setting 1189 The oral and documentary evidence relevant to the cross-claim runs into thousands of pages. The written and oral submissions on it, to many hundreds of pages. In an attempt to render this material manageable I intend (a) to deal synoptically with the evidence on such issues as I consider to be of real significance in the cross-claim and (b) to deal cursorily or not at all with issues I consider to be of no particular moment. Because of the nature of the claims made it will be necessary, though, to refer verbatim to some number of letters and minutes. 1190 Put generally the relevant evidence falls into four loose phases. The first ran from that time in 1993 when STUBS became the preferred option to provide boundary security for the ADCNET system, until shortly after the execution of the ADCNET contracts in September 1994. The second phase was that in which the process of exploring alternative strategies to STUBS began. The third was the period in which official endorsement was sought for an alternate strategy. And the fourth was the period leading up to the communication to BHP-IT and GEC Marconi in September 1995 that STUBS had been cancelled. I do not assign dates for these phases (other than the first) as they are not agreed. The phases themselves merely provide easy but inexact vehicles for ordering the evidence. 1191 Before dealing with them in turn and so as to give some focus to the ensuing narrative, I would note the following about the STUBS procurement generally and issues to which it gave rise. First, there was over time a decrease in the number of STUBS devices likely to be ordered by DFAT and an increase in the projected price of the devices. Price did at some (disputed) time become an issue. With DoD also being interested in procuring STUBS, there was a related question as to the significance of each Department's projected procurement to AWADI's commitment to STUBS and its pricing of the devices. Secondly, there were two significant risks associated with the STUBS procurement. One was that the STUBS devices were required to achieve what was described as an ITSEC Evaluation of E5. This evaluation involved an assessment by DSD of the security of the system according to criteria endorsed by DSD. No security device previously used by DFAT had reached the E5 standard. DFAT insisted that AWADI bore the risk of not reaching that standard. The other risk related to whether DSD would be able to perform its ITSEC evaluation within the timeframe required for the ADCNET project. Thirdly, the ADCNET contracts provided only for the use of STUBS devices in Canberra and not at overseas posts. This limitation on its use gave rise to what was known as the "trade-off between security and functionality", a matter that attained prominence in mid-1995.
(iii) Decision Making in DFAT 1220 On 29 March an ADCNET firm price management meeting was held involving amongst others Les Cook, Mr Nichols, Mr Brent and Mr Wishart. A handwritten note of the meeting recorded the following: "Kim Jones (Acting Secretary - DFAT) to talk to DSTO and AWADI this week. DFAT may raise a CR to conduct acceptance tests without STUBS devices. DFAT to make a judgment on whether STUBS is in the project or not within the next 4 weeks." The minutes of this meeting recorded that "[t]he status of STUBS requires constant monitoring. STUBS to be a standard subject item for all Project Management Meetings". 1221 On 30 March 1995 Kim Jones, Les Cook and Mr Nichols met with Dr Sinnott and Ms Thorpe of DSTO. Les Cook prepared a minute for Mr Skinner that discussed the meeting. Ms Thorpe sent to Dr Sinnott her notes of it. Both are in evidence. Ms Thorpe's notes indicated that DFAT was concerned as to whether STUBS would be available within DFAT's timeframe (March 96) or otherwise they would need to consider alternatives now. DFAT indicated that it was now intending to purchase around 50 "because no overseas capabilities and because so expensive". DFAT also sought DSTO opinion on the "window of opportunity" for STUBS before superior technology became available. DSTO expected its own new technology "to be available in 1-2 years". 1222 Les Cook's minute of the meeting indicated that Dr Sinnott would not state an opinion on whether STUBS would proceed nor whether DoD would act if DFAT "pulled the plug". The minute included the comment that "DSTO seems to be searching for a scapegoat for the lack of success of STUBS … [and] [i]t seems very likely that DFAT will be the chosen scapegoat". 1223 On 3 April Dr Sinnott prepared a DSTO minute on the "Future of Australian Infosec Capability". He expressed the view that there was a high likelihood of AWADI cancelling further STUBS development within the next few months on account of mounting development costs, uncertainty as to timescale for STUBS' evaluation and absence of any DoD commitment for purchase of STUBS. 1224 On 4 April both Mr Nichols and Les Cook prepared minutes for Mr Jones (and others) relating to the proposed meeting with AWADI. Mr Nichols sought answers to questions concerning (inter alia) the "new pricing structure … to DFAT" and whether STUBS could be delivered in accordance with ADCNET's schedule. Les Cook's minute related to the minimum requirements for a contract. It reiterated that STUBS should be supplied "in the quantities and schedule (sic) previously defined by DFAT" and that E5 accreditation was a requirement for delivery of production units. 1225 An AWADI memorandum of 12 April 1995 reported a meeting with DoD. It indicated that DoD was informed that "significant capital [was] required to complete STUBS"; "that Defence [was] the primary customer for STUBS as it now stands"; and that "AWADI [saw] the investment risk as too large to proceed with the STUBS development unless there [was] a clear commitment from Defence for future purchases". 1226 A special meeting of the SPC occurred on 26 April 1995 to consider "Security and Functionality Tradeoffs". There are various notes of this meeting. A draft minute of that meeting was prepared by Mr Holly of ITB. Because of the importance attributed to the minute by BHP-IT it is necessary to set out one lengthy extract from it. It appears under the heading "Discussion". "As it is not sure whether Stubs will be available, two sets of questions arise. On the assumption Stubs is available, do we stick with it? Discussion looked at options for capping ADCNET at confidential or restricted and whether a change could be made at this point of time, … Lowering the overall classification of ADCNET to allow for greater connectivity would require the setting up of a separate backroom system for highly classified traffic … The meeting agreed that the level of classification planned for the ADCNET system should remain at Secret, Austeo. Mr Cook explained that [DFAT], in the person of the Secretary, accredits a system and decides whether or not it is prepared to use that system for its data and classification levels. The DSD role is advisory … With greater connectivity between systems DSD advice would be that the system should not be used for information classified higher than Restricted. With STUBS available to us the classification could remain at Secret. It was agreed that if STUBS became available we should probably persevere with it. … Agreed that we continue to develop ADCNET software in anticipation that Stubs will become available. Mr Jones summarised discussion by suggesting that we leave the Stubs aspect unresolved as there is doubt about whether it will eventuate in the immediate time frame of the move to the new building. On the assumption STUBS is not available what do we do then? The trend of opinion is to go for the more functional version (Option C) of the Stubs alternatives outlined Paragraph 26 of Mr Cook's paper. Option C enables posts to have inter activity between ADCNET and NNS while Option B does not. … The meeting agreed that Option C should be adopted recognising the questions that flow from that decision and also agreed that we look very seriously at any system that is available subsequently to improve the security assurance rating." Emphasis added. 1227 To anticipate matters again, a minute of the 26 April SPC meeting was prepared on 21 May 1995 for consideration at an SPC meeting on 25 May 1995. That minute stated in part that the SPC: "(i) did not achieve consensus on whether the functionality of option (c) … justified not using STUBS were it available under acceptable contractual terms. It was argued that the proposed implementation of option (c) included adequate measures to counter the major threat of external penetration into ADCNET. Moreover those areas most vulnerable to threats of attack were assessed as having a very low probability of occurrence. It was also argued that the inflexibility of the STUBS approach would tempt staff to use insecure systems to bypass the ADCNET security controls, such as using NNS systems for material which should be classified. The counter argument was that without STUBS it will not be possible to provide an objective assessment of the significance of the security risks. (j) concluded that if STUBS were not available, then the advantages to the Department of option (c) of the paper, including deployment of gateways at posts, outweighed the more constraining approach described in the paper as option (b); (k) concluded that if Stubbs was confirmed as a viable security alternative, then the Department will needed to determine whether it should be used given the arguments for and against security assurance and user functionality." 1228 I would note in passing that Les Cook's evidence was that he could confidently recall a conversation in which he told Mr Brent of the 26 April SPC meeting. I would also note that a variant (unexplained) of the 21 May version of the minutes were annexed to an Administrative Circular of 17 July 1995 a copy of which was distributed to Mr Brent. 1229 Reverting to earlier in May, on 10 May 1995 a meeting was held involving representatives from DoD, AWADI and DFAT (Mr Nichols). Mr Nichols prepared a minute for Mr Skinner on 17 May 1995. It read in part: "2. AWA revealed that the original pricing was based on expected sales of 2,000 units. Defence and DFAT requirements will amount to the sale of only some 400 units at a cost per unit of $29,500 to Defence and $34,000 to DFAT. (The higher cost to DFAT is because of royalties to be paid to DSTO. Defence indicated, however, that this cost could be paid directly by Defence to DSTO to reduce DFAT's price to around $30,000 per unit.) 3. AWA also indicated that they have spent $2M so far in R&D and will need to spend another $3.45M ($0.6M for evaluation by Admiral, $1.3M for further R&D, $0.75M for manufacturing, $0.5M for licensing and $0.3M for trials). 4. AWA still expect to be able to produce a prototype by 3rd quarter 1995 and some production units by 1st quarter 1996. There were still some technical issues outstanding which needed to be resolved by DSTO. 5. Defence suggested that it would be in AWA's interest to not cancel the project, but to find ways of bringing the price down (eg by reducing functionality, not using milspec development techniques, accepting an overall loss which would be less than the $2M spent so far). AWA said that it was too close to finishing Stubs to radically reduce the functionality. Also AWA wish to recover full costs rather than accept a loss. 6. Defence also suggested that Stubs would not have a long life span and that they were looking at other options (presumably what Don Synot (sic) of DSTO had described). They implied that a 3 year contract period (including maintenance) would be appropriate. I said that DFAT would want certainty of support for Stubs for at least 10 years. … 9. AWA admitted that the timing of the evaluation of Stubs by Admiral was not clear, but that it could take as long as 1 year. … 11. AWA agreed to try to provide Defence (copied to DFAT) a proposal with revised prices by the end of next week. The pricing would be scaled based on the volume of units to be purchased (eg 300 units, 350 units, 400 units) allowing Defence to see what the pricing would be if DFAT withdrew." 1230 In an internal BHP-IT email of 15 May, Mr Brent recounted that he had been informed STUBS issues were due to be resolved that week. AWADI was to make a decision whether or not to proceed with the program or cancel it following discussions with DoD. He indicated this would provide "a further opportunity" to extend the ADCNET contract schedule. The same email made reference to a recent "regular (fortnightly) management meeting". 1231 On 18 May 1995 Mr Brent wrote to Les Cook a letter that addressed directly the issue of STUBS. It is set out at length in Part II: Emulation Variation Agreement (a)(i). I would note here that the letter was prefaced by the observation that "[d]uring the course of recent project management meetings there has been a lot of discussion concerning the status of STUBS". It noted the following in dot point fashion: ". STUBS Software Interface Specification is delayed 4 months; . STUBS delivery is likely to be delayed; . STUBS may not be delivered at all; . the Department does not have a contract for the delivery of STUBS; . high level discussions between AWA, DFAT, Defence are imminent and will decide the outcome. This may well be that the STUBS program is cancelled within AWA." It later observed that "[w]hatever the outcome of STUBS availability we need to move quickly … to contain significant and costly delays". 1232 Les Cook was away at the time of this letter and it was received by Nichols who left it to Les Cook to reply. This occurred on 6 June 1995: see Part II: Emulation Variation Agreement (a)(i). 1233 On 19 May AWADI wrote a letter to DSTO which read in part: "At a discussion with Jim Noble AS JPM Defence Materiel Division, 19 May, AWADI committed to the following schedule for the STUBS program. . Sealer demonstration: July 1995 (full working prototype less encryption algorithms . Defence contract: September 1995 . Hardware designs complete: December 1995 . First prototype system: January 1996 . System integration commences: January 1996 . Formal system acceptance testing complete: June 1996 . First production units available following DSD approval of field use of STUBS This schedule assumes an early 'Letter of Comfort' from DEF Material, a Contract for near 400 units by end August 1995, contract provision which satisfactorily manage the remaining risks and an acceptable price." 1234 The SPC meeting of 25 May 1995 was not attended by Kim Jones or by Les Cook. Again there are several versions of this meeting. The minutes recorded discussion and comment on the 21 May version of the 26 April 1995 SPC meeting. They indicated that when in final form those minutes would be forwarded to the Senior Executive ("the SE") with recommendations. They notedMr Nichols' report of his recent meeting with AWADI. It also was indicated that DSD had undertaken to provide advice to the Department on Les Cook's Options B and C. A handwritten note of the meeting additionally had Mr Nichols reporting that the evaluation of STUBS would be a further twelve months after its installation. The minutes recorded that the timeframe for building an alternative to STUBS into ADCNET had passed. The handwritten notes also recorded comments attributed to Mr Cotton. They referred (inter alia) to "Final cut-off date" and "can't drag on we need to drop out". 1235 On 26 May 1995 Mr Nichols in an email to Mr Skinner expressed the view that "[o]n cost grounds … a decision could be taken to abandon STUBS provided: (a) the 3 month delay to project is acceptable (b) DSD are not insistent that we use STUBS no matter what the cost and risks". 1236 Prior to receiving a reply to his 18 May letter to Les Cook (who was overseas at the time) Mr Brent sent a further letter to Les Cook on 1 June enclosing a newspaper article concerning AWADI's financial difficulties. The letter stated that "[i]n view of the situation we need to consider alternatives to STUBS". Les Cook responded on 2 June 1995 in a letter that stated in part: "The Department was aware of the article and shares your concern as to whether dependence on the STUBS device is likely to lead to problems. I note that there is presently no proposal from AWADI to change the schedule for STUBS development, but I also note that AWADI has still not entered into an agreement with DFAT. We have been advised that the price of STUBS devices is likely to increase by a factor of more than two. DFAT is in the process of determining its response to this advice. We do not believe that there is any practical alternative to an implementation of ADCNET based on the concepts of sealing and gateways … The Department's Executive is scheduled to meet in the week commencing 12 June to consider whether to proceed with STUBS or to return to an approach in which sealing and gateways are implemented by PSI-developed functions operating on ADCNET-compatible equipment. To date we have been reluctant to involve the PSI in examination of design options in order to avoid work which may prove to be unnecessary. Until a decision is taken that STUBS is not practical or economic, this remains the case. We have, however, been active in examining contingency measures should the use of STUBS not be possible. This work has involved DSD, whose advice as to the adequacy of any approach will be important to its acceptance. At this stage it does appear that there is an approach which could be implemented without major change to the current ADCNET design, although it will require some additional development by the PSI. An outline of this approach is attached for your examination. Please note that the document is a draft at this stage and is intended to form the basis of a proper examination leading to a change request should this be necessary." 1237 The attached document, entitled "STUBS Alternatives - Design Criteria and a Proposal" was dated 25 March 1995. Mr Brent had no recollection of this letter or its attachment. 1238 On 6 June, as noted earlier, Les Cook replied to Kyrill Brent's 18 May 1995 letter. I merely note that in it he (i) outlined the Option C proposal which was being taken to the DFAT executive; (ii) he indicated that "the Department intends to make a decision on the use of STUBS or this approach within the next two weeks"; and (iii) stated he would inform BHP-IT "as soon as such a decision is reached". 1239 AWADI's foreshadowed pricing proposal for STUBS was provided to DFAT and DoD on 5 June. The letter to DFAT acknowledged the delay in providing a response. It costed the STUBS sealers, gateways and KDC by reference to quantity ordered, the unit prices decreasing as the orders grew in units of 50 from 200 to 400. The 200 unit prices were respectively sealer - $42,403, gateway - $41,632 and KDC - $42,537. The letter to DoD which was annexed to DFAT's letter indicated that "Production (assuming a total purchase by Defence and DFAT of 400 units) will take place in two batches of 200 units over a period of approximately 18 months". 1240 When Mr Skinner was informed of the pricing proposals, he sent an email to the members of the IT Executive indicating that on the new prices DFAT was "faced with massive cost overruns". He stated that draft DSD advice was positive and would not discourage DFAT from implementing Option C. He continued that "this all appears good news and would support a decision to not proceed with STUBS". The email concluded: "We need to agree on and put to the Executive for formal approval - . whether to proceed without Stubs . how to terminate Awadi negotiations . whether Option B or Option C . paper to go to Executive and when . briefing to Ministers to counter possible reps from Awadi." 1241 A draft minute for submission by the IT Executive to the Senior Executive was prepared by Les Cook on 6 June 1995. It related to the use of STUBS. The minute referred to (a) AWADI's revised prices and the likely timetable for the availability of devices; (b) the cost increase for the Department and the need for augmentation of funds in the order of $1.25 million to $2.25 million in 1995/96; (c): "AWADI advise that prototype units will be available in 1st quarter 1996, too late to be included in ADCNET Release 3 software testing. Production units will be available over a period of 18 months, the earliest possible availability of sufficient units for DFAT being September 1996. AWADI will not commence production unless orders for at least 200 units are received, Defence are currently considering a proposal to order STUBS devices in September 1995;" (d) DSD's opinion that Option C would protect against perceived threats; (e) the need to negotiate changes to the ADCNET software specification if the Department decided to proceed with Option C; and (f) the uncertain effect on the schedule for completion of development but by late July it should be predictable whether development would be completed in time to avoid the need to transfer the IBM message switch to the new building. The draft recommendations to the Senior Executive included the following: "a. advise AWADI that procurement of STUBS devices for ADCNET will not proceed because of high costs, uncertain date of availability of production devices, uncertainty about long term support and inability to deploy sealing and gateway functions at posts; b. adopt the security architecture outlined in Attachment 1 as 'option C', accepting that independent evaluation of ADCNET security will certainly identify the potential security weaknesses described in that document and confirmed by DSD; c. commence negotiation with the PSI for changes in the ADCNET Release 3 software specifications in order to implement the architecture described as option C in Attachment 1, with a view to defining a new project price and schedule by end July 1995." I would note in passing that the first quotation in the body of this paragraph is the subject of an attack by BHP-IT on the credibility of Les Cook. Mr Nichols gave evidence in which he accepted that statements made in the quoted paragraph were inconsistent with correspondence of which he was aware or which he had composed. 1242 Kim Jones had written a note on the version of the draft he had received stating: "what will be their [ie AWADI's] reaction? Can they sue us?" That note led to a request for legal advice on 19 June 1995 from DFAT's in-house lawyers. 1243 The draft paper was scheduled for discussion in the IT Executive on 9 June. The evidence on whether it occurred on that day or some day soon thereafter is inconclusive. It is unnecessary to recount it. It is clear that when notice of the meeting was given (ie 8 June 1995) the formal advice of DSD had not been received. It was provided in a document dated 9 June 1995. The recommendations made were that: "a. if STUBS is available and it is practical to deploy it in sufficient numbers it be used; otherwise b. Option C be adopted but replaced when STUBS or a similarly strong alternative can be acquired; and c. precautions of the sort described in para 9 above be adopted in addition to those proposed in the reference.": emphasis in original. 1244 By a Minute of the same day Mr Allen of DFAT's Diplomatic Security and Countermeasures Branch wrote to all members of the IT Executive concerning the proposed STUBS alternative. His paper was critical of the level of security offered by Option C; it noted that DSD advised its use as an interim solution "pending availability of STUBS or a similarly strong alternative"; and he asked whether other (indicated) options should be explored. 1245 Mr Campbell, who was Assistant Secretary, Corporate Services Division in the Department appears to have been given the task of redrafting Les Cook's 6 June draft in light of comments made at the IT Executive meeting that considered it. The redraft also took obvious account of Mr Allen's comments. It formulated the options available as follows: ". to continue to plan for the use of STUBS and provide the necessary funding, while being aware that if Defence does not proceed to order STUBS we may have to move later in the year to one of the other options and it will cost more at that stage to do so. . decide now to change to use of option C, on the basis that it will be cost neutral but we should keep looking for a more secure gateway system. Also bearing in mind that, even with this option, it may be necessary to move the mainframe to York Park because time may now be insufficient to have option C operating at the time of the move." 1246 The Campbell paper noted that the Legal Office still had to confirm that there would be no financial or legal obligations on DFAT were it not to proceed with STUBS. Kim Jones request for legal advice was forwarded by the Department's own lawyers to an officer of the Attorney-General's Department on 19 June 1995. Advice was sought on DFAT's possible liability arising out of its contract negotiations with AWADI. The letter to the Attorney-General's Department noted that "DFAT officers will be discussing a proposed course of action regarding this matter with Deputy Secretary Jones on Monday 26 June 1995". The advice was sought prior to that date. 1247 A meeting of the Department's Senior Executive was also held on 19 June. Mr Jones and Mr Cotton were present. Insofar as presently relevant, the minutes of that meeting noted: "IT security and functionality tradeoffs . The Executive discussed the issues raised in the minute prepared by CSD, covering the minutes of the special meeting of the Systems Policy Committee on 26 April 1995 - and took note of the matters on which a decision would be required in the near future (separate papers to be submitted)." Neither Mr Jones nor Mr Cotton had a recollection of this meeting. The Commonwealth has been unable to identify or find the CSD minute referred to in the above minutes. I have, though, referred earlier to the differing minutes of the 26 April SPC meeting including those prepared on 21 May 1995. 1248 Also on 19 June Mr Nichols sent an email to Les Cook and Mr Skinner recounting a conversation with Mr Noble from DoD. Mr Noble had indicated that Defence was still serious about STUBS; and work was being done on a paper to go to a committee which would meet in September/October to make a decision. 1249 It is necessary now to revert to a minute prepared by Les Cook on 17 June 1995 and sent to Mr Skinner. It has been described as the "Change of Tactics" minute for such was what was proposed in it by Les Cook and Mr Nichols "with regard to the STUBS decision". It needs to be referred to at some length. It said in part: "3. If the decision to adopt option C is taken at this stage, we are concerned that a change request of this type will give the PSI a lever to prise open a large extension of schedule and consequent cost increase. I believe that the actual amount of change required will not be large but at this stage it will be difficult to argue with PSI estimates and these will inevitably be very conservative. The alternative is to allow the development to complete as if STUBS is to be used, with an agreed mechanism to emulate the STUBS devices for acceptance testing (the latter will certainly be required if STUBS is to be retained, as it will not be available in time for testing). A new contract might then be negotiated with the PSI for the required set of changes to the delivered Canberra system, including the Option C changes, porting to HP/UX 10 and possibly inclusion of new versions of Applixware and other COTS packages. These changes may be performed as a new fixed price or on time and materials. 4. By the time of such a contract, it will be more clear how option C will be implemented and risks (to the PSI) of delays to the rest of the schedule will be eliminated as a cost factor. Although a small amount of development and testing will have been performed unnecessarily, the overall cost is likely to be lower and the option of retrofitting STUBS or a similar device later will be retained … 5. If the approach of delaying the change to the functional specification is adopted in the case of option C, then it becomes less urgent to make the basic decision as to whether or not to use STUBS. The Executive will probably be more comfortable making this decision when the firm intentions of Defence are known. This means that we should consider changing previous advice to Kim Jones that it is imperative to make a decision as soon as possible. The options open to the Executive would be: (i) decide firmly on option A (STUBS) now, with deployment of 70 devices; (ii) decide firmly on option A (STUBS) now, with deployment of 20 devices in the Comms centre and help desk only; (iii) decide firmly on option C now; (iv) delay the decision until Defence's intentions are firm, which will probably be September/October 1995. A decision at that time to use any of the above options should not be significantly more expensive than an immediate decision. 6. In the cases of options (i), (ii) and (iv) it is likely to be the end of 1996 before any STUBS devices are available; this will necessitate moving the IBM to York Park. In the case of option (iii) it is possible, but not certain, that this could be avoided." 1250 I would again note in passing that the submission made by BHP-IT is that by the time of this minute the IT Executive had determined to cancel STUBS and replace it with Option C. The change of tactics only affected the timing of that decision so as to place DFAT in a position of advantage in subsequent contractual negotiations with BHP-IT. 1251 On 22 June 1995 Les Cook sent what was in effect the "change of tactics" proposal to Mr Jones and the other members of the IT Executive. It was in a minute entitled "ADCNET Gateway - Timing of Decision". I need refer to four paragraphs of the minute because BHP-IT and the Commonwealth have sought in submissions to exploit different aspects of them: "2. At the time of writing we still do not have a formal reply from Defence concerning firm intentions to purchase STUBS. Neither do we have formal advice concerning possible liability to AWADI should we not purchase STUBS. Defence have promised a reply this week. The ALD section has passed all the relevant papers to Attorney General's Department, which has not yet responded. These factors may make it difficult for the Executive to make a firm decision. 3. The ADCNET project team has re-examined the cost and schedule impacts likely to arise from a decision to adopt option C. We believe that the stage has now been reached at which it would be less costly to allow the PSI to complete work according to the current requirement specification and to perform the work necessary to implement option C following acceptance of the Canberra system, scheduled for February 1996. The main reason for this belief is that the PSI would take advantage of a significant change request at this late stage to attempt to recoup some of the delays which have occurred in their development to date; at the very least they will be very conservative in estimating the effects of a change and the cost of delays will be quoted in terms of the expense of the entire project team. Our currently strong contractual position on delays (including penalty payments) would be lost. 4. The effect on the overall schedule should also be reduced. This is because it is possible to perform the major parts of the cutover of the Canberra message switching function prior to the completion of option C changes (or receipt of STUBS). During this period, all communication with non-secure systems will remain via the IBM system. A side benefit of completing development of the original specification would be the ability to retrofit STUBS or a similar device into ADCNET at a later date should this be decided. … 6. These considerations lead us to suggest that we have reached the point at which it is less urgent to make a final decision as to whether or not to use STUBS. An indication of the likely decision would be helpful, however, in determining the degree of DFAT effort to be expended in testing the STUBS interface software or defining the changes required for option C." Emphasis added. 1252 On the minute sent to Mr Jones, Les Cook made a notation that Mr Skinner had suggested that, if Kim Jones decided to request a decision from the Senior Executive on 26 June, he might wish a brief discussion of this minute first. Kim Jones in turn added the notation: "This is a helpful suggestion but we should discuss somehow on Friday where to steer next. My preference would be to delay if that is not a problem, as we would then know more about STUBS." Mr Jones had no recollection of discussing the minute with anyone on 22 June or subsequently. 1253 I should interpolate at this point that there were a considerable number of occasions in cross-examination in which it was made plain that both Les Cook and Mr Nichols had for at least several months held to the view that the best approach for DFAT to adopt was to drop STUBS and substitute Option C. They both denied repeatedly, though, that a decision had been taken by the IT Executive, the SPC or the Senior Executive to that effect. They equally denied they had received a "nod and a wink" to the effect that Option C would be adopted whatever the known availability of STUBS. 1254 On 22 June 1995 a meeting was held of the ADCNET Security Sub-Committee. This body was chaired by Mr Allen (to whom the 22 June "Timing of Decision" minute had been sent). The minutes record Mr Allen asking Les Cook about "the current state of STUBS". Les Cook is recorded as saying that they were still awaiting confirmation from DoD about their intentions and about how many they planned to order; that AWADI would not sign a contract with anyone; that DFAT had not firmly decided to continue with STUBS and was examining several options; and that: "ITB are about to advise the Executive that we have reached the stage of development of Release 3 where even if they decide to move away from STUBS we will complete the development of the software based on the current specification of the software which assumes the use of STUBS." 1255 The Senior Executive met on 26 June. The minutes of that meeting are unyielding of reliable information of present relevance. While there is contradictory evidence from Mr Jones as to whether he took the 22 June minute to the 26 June meeting, the proper inference to be drawn in the circumstances is it is probable it was mentioned at that meeting. I will return to this matter when I make my findings. 1256 In late June Mr Hender of AWADI was expressing to DoD his concern that he would not be able to get board approval to continue the development of STUBS but he believed he could get it if he had some commitment from DoD as to numbers and price, even if this was to be subject to later endorsement. Defence was unprepared to make this conditional commitment. 1257 Mr Noble of DoD informed DFAT on 3 July that it was putting forward a capability submission (that encompassed STUBS) for formal consideration in September 1995. On the following day in a DoD internal memorandum Mr Hammond recorded that DFAT was "maintaining an interest in the [STUBS] proposal but is not showing significant commitment. Informal advice indicates that they are pursuing a less functional solution." Mr Skinner responded to DoD's 3 July letter on 6 July indicating that DFAT would delay its decision on the purchase of STUBS "until Defence's plans are firm and AWADI's terms and conditions are known." He also indicated that BHP-IT had been instructed to proceed with the development of ADCNET on the basis that STUBS would be acquired. 1258 Sometime prior to this 6 July letter but after 22 June, the IT Executive agreed to the proposal in Les Cook's 22 June minute. Les Cook was away during this period. Mr Skinner sent an undated email at least to Mr Cook and probably to Mr Nichols. The email stated: "As mentioned to LC, [IT Executive] agreed with your suggestion that we proceed with R3 as if Stubs will be available and keep tabs on Awadi and DoD positions in the interim. When R3 is available, if Stubs is available then we have BHP add additional features that we want; if STUBS is not available, we do above and add software gateways as well. KJ would like you to informally keep DoD informed of our plans. AS" Les Cook annotated a hard copy of this email which he went to Mr Nichols. The annotation read: "AS asks that you inform Defence of our intention to delay final decision on purchase of STUBS until Defence's plans and AWADI's Ts & Cs are firm." I note in passing that this annotation is in almost identical terms to those used by Mr Skinner in his 6 July 1995 letter to DoD. It is Mr Nichols evidence that he drafted that letter. Mr Skinner had no independent recollection of it. 1259 Again I note in passing that it is BHP-IT's submission that DFAT had made a decision to complete the R3 contract without STUBS. It was not going to perform its contractual obligations in accordance with the provisions of the Head Contract. 1260 On 6 July the Attorney-General's Department provided the legal advice sought of it concerning DFAT's possible liability if it decided to cancel negotiations with AWADI. It was advised that the risk was "very small". 1261 Before passing to the next phase in the evidence I should indicate that there was significant cross-examination of Commonwealth witnesses on the meaning of the phrase "if STUBS is available". Illustrative of this was the following cross-examination of Kim Jones: "Young QC: If you were to finish the R3 contract without STUBS part of that alternative was to leave the door open to use or not use STUBS at the other end f the R3 contract; do you agree with that? Jones: Yes. Q. So the final decision as to whether you use STUBS or some alternative is going to be addressed again on completion of the R3 contract? A. If STUBS became available. Q. If STUBS became available, right? What does 'available' mean in your answer you just gave me? A. It means available in time to be deployed after the software is implemented. Q. Does it mean as well, available to be deployed in sufficient numbers to suit DFAT's purposes? A. Well, yes, clearly it means more than one device being available, or something like that. Q. Does it mean available to be deployed at a cost that is palatable to DFAT? A. Yes. Well, clearly cost would inevitably be a factor within certain parameters. Q. And your first element of your definition of available was 'available in time to be deployed'; what does that mean? A. It means being put in action in the ADCNET system when the Release 3 software was put into operation. Q. But in terms of concrete dates what does that mean? A. Well, that was uncertain at the time because the Release 3 contract was running behind schedule, as was STUBS. Q. But, Mr Jones, you must have had in mind in your concept of 'available' some time by which the deployment would have to be completed? A. Well, that would - at that stage it was in time to enable us to move to the new building without taking the IBM with us. Q. But if a decision about use of STUBS was delayed until completion of the R3 contract, that was never going to be an option, was it? A. Depending on when the R3 contract was completed." 1262 I will refer to this further below when dealing with submission.
(iv) Communicating decisions to BHP-IT and GEC Marconi 1263 On 7 July there was a meeting of the ADCNET Acceptance Test Team. The minutes of that meeting contains an item concerning issues arising from the lack of STUBS. It was there recorded: "Status: PSI is still unaware of DFAT official position on STUBS. RN to provide PSI with advice in relation to the go ahead with the emulation of STUBS for testing. R Nichols to speak to L Cook regarding contract variations and will then advise." Mr Nichols could not recall in evidence what he told BHP-IT at this meeting. 1264 On 12 July a handwritten note of a project meeting between BHP-IT and GEC Marconi recorded that, at a meeting held "last Friday" (ie 7 July) with Mr Skinner and Les Cook, they were informed that "PSI to go ahead on assumption STUBS is available". 1265 Mr Cotton, who was then acting as Deputy Secretary in Kim Jones' absence, distributed an "Administrative Circular" on 17 July 1995. This went to all divisions, branches, posts and regional offices. The copy in evidence has a handwritten annotation "Kyrill, FYI, DMcG 21/7". The word "Kyrill" has a line through it in the fashion of a cross - off. Mr Brent, I should add, had no recall of ever having seen the circular or of having crossed off his name. 1266 The subject of the circular was "IT Security and Functionality Trade-Offs". It referred to the SPC meeting of 26 April and annexed the 21 May version of the minutes of that meeting. It noted (inter alia) that (a) there were some doubts about the availability and affordability of STUBS; (b) "Subsequent to the SPC, the Executive has agreed that ADCNET Release 3 development will proceed incorporating usage of the Stubs device with its high level of security assurance; the Executive has deferred a decision on the long term usage of Stubs until the availability and affordability of Stubs becomes clearer later this year"; and (c) if there was "a decision not to use STUBS", software gateways would have to be incorporated after the acceptance of R3 from the developer. 1267 On 21 July a prototype of STUBS was demonstrated. Mr Nichols attended that demonstration with DoD officials. A contemporary note of his indicated he asked if DFAT could "acquire [from AWADI] the 'untrusted software' and any STUBS simulation software which may have been developed". He also recorded that "the performance of STUBS was generally good" and that "AWADI now see DFAT as being a minor customer". 1268 On the same day a meeting was held between DoD and AWADI officials ("the STUBS Advisory Board"). The minutes (para 4.2) noted a further program slippage of five months and that prototypes would be available by mid-1996. Under the heading "AWADI's view of the Future" it was indicated that if AWADI did not receive a contract from Defence then the board was likely to cancel the project. 1269 An internal AWADI Project Status Report prepared in early July stated (inter alia): "DFAT contract has not been progressed; awaiting agreeable resolution of ADF situation [the reference to the ADF was for a contract with DoD for 343 devices]; … Draft contract has not been agreed or accepted by AWADI". 1270 It is clear that, both from rumour and from notes of a meeting of the ADCNET Acceptance Test Team, the expectation was being entertained in the project team that "STUBS is now a goer", but that DFAT's official position was to be provided to BHP-IT. DFAT wrote to BHP-IT on 25 July 1995. This letter is set out in Part II: Emulation Variation Agreement (a)(i). It raised the issue of a Change Request to allow emulation to be used for acceptance testing. It referred to it not being "possible to provide sufficient STUBS devices to meet the requirements of the Acceptance Test Plan": emphasis added. When taxed in cross-examination with this comment Mr Cook said: "Zero is an insufficiency. I'm not sure why I phrased it that way". 1271 The 10 August 1995 letter from Les Cook to Mr Brent dealing with the subject of schedule extension contained references to STUBS. Referring to the use of emulation for acceptance testing it indicated that "any defect in the PSI's Developed Software which may be encountered when STUBS is implemented will be remedied under the warranty for the Developed Software". 1272 It is unnecessary to repeat here the later correspondence prior to the announcement in September that STUBS had been cancelled which related to emulation of STUBS, other than to reiterate (i) that it was STUBS that was being emulated; but (ii) that the contracted date for the delivery of STUBS (ie 1 August 1995) had passed. 1273 Reference has been made above to DoD finalising a major capability submission ("MCS") for formal consideration in September. An August draft of that submission noted (inter alia) that recent advice indicated that DFAT considered STUBS to be too expensive and was pursuing alternative options. A DoD meeting was held on 29 August to consider issues raised and to ratify the approach taken in the draft submission prior to formal consideration of it in September. Notes of that meeting are in evidence and include the following: ". After discussion, option generally supported (FDA quiet) to pay AWADI for IP (seen as appeasement) on the grounds that Defence would be hard put to defend against a charge that AWADI was justified in believing a contract was forthcoming. DFAT viewed bitterly as more culpable - had continually promised contract. . MCS to be modified (due with FDA 31 Aug!) to the above effect - no Stubs purchase. … . [First Assistant Secretary Defence Material] asked for guidance - what to tell AWADI? Agreed by [Vice Chief of the Defence Force] that words should be 'unlikely that [September committee] will support acquisition of Stubs.' [Has since told them - AWADI in shock!]" 1274 In its submissions the Commonwealth made lengthy reference to ensuing correspondence between AWADI and DoD and internal minutes of AWADI. That correspondence dealt, initially, with the foreshadowed purchase or licensing by DoD of AWADI's intellectual property for STUBS and the approximate cost and delivery availability of working STUBS prototypes that were available or which could be made available without substantial additional work. Attention within AWADI turned to the future of the STUBS development in light of DoD's interest in acquiring the STUBS prototypes. On 11 September 1995 a proposal was raised by AWADI's Managing Director to develop the prototypes to full functionality but without accreditation. In that context it was stated: "We need to make DFAT aware of the current situation and get feedback on their likely future STUBS plans (if any), either in isolation or in conjunction with limited DOD procurement." On 12 September Mr Noble of DoD informed Mr Nichols of Defence's decision not to proceed with STUBS. Mr Nichols sent a note of that meeting, as also of a phone call he made to AWADI on the following day, to Les Cook. Insofar as presently relevant that note stated: "2. Defence are now negotiating with AWADI for the purchase of the STUBS Intellectual Property Rights and prototypes. This will mean that AWADI will effectively be paid for their development effort to date. … 4. On 13/9/95 I contacted Mark Hender of AWADI (General Manager, Business Operations and Planning) who confirmed that Defence will not proceed with STUBS. AWADI will now not proceed with: (a) unfinished development work (estimated at $0.5M) (b) the acquisition and installation of cryptos into the devices (c) the independent evaluation of STUBS (estimated at $0.6M) 5. AWADI may be willing to manufacture 50 units for DFAT provided that the additional cost (estimated at more than $1.1M) is amortised over the purchase price of STUBS. This would raise the price of a STUBS sealer to an estimated $50K. AWADI has agreed to advise DFAT of indicative new pricing." 1275 An AWADI memorandum recounting the latter conversation referred to the price of "$50K per unit" and said "I think this shows that we are unlikely to get an order from DFAT unless we also get an order for at least 50 units from Defence". 1276 At a 13 September meeting between Mr Hender of AWADI and Mr Noble of Defence AWADI's proposal was raised. Whatever expectations may have been generated there an AWADI memorandum of the following day from its managing director, entitled "STUBS Closedown Plan" indicated that: "Unfortunately, the latest message from Jim Noble to Mark Hender contradicts his earlier indications, and his direction to us is to minimise further expenditure on STUBS. In preparation for the meeting with Defence on STUBS next Thursday 21 September, would you please take the following actions: 1. Assume a closedown date for the STUBS project of 30 September 1995. 4. Instruct Nick Davias to initiate no new work, and to restrict existing activities to completion of logical sub-tasks. 5. Prepare a plan for recording and parcelling up the hardware and software for provision to Defence as soon as formal agreement on compensation is reached." 1277 Negotiations ensued for the licensing of STUBS intellectual property and for the delivery of prototypes etc to DoD. 1278 On 13 or 14 September 1995, Les Cook announced to Kyrill Brent and Roger Cook that STUBS had been cancelled. I will refer below to the evidence on that matter as also on the meeting of 15 September 1995. 1279 There was a meeting of the ADCNET Security Sub-Committee on 22 September 1995. The minutes record the following: "Availability of STUBS Mr Allen suggested that this topic could be dealt with very quickly. Mr Cook said that there was unofficial word from DoD that they would not buy STUBS. We have asked AWADI to provide DFAT with a letter that they no longer wish to supply STUBS to us." 1280 In answer to a question of mine Mr Cook said he thought the last sentence referred to the request by Mr Jones to check whether AWADI believed that DFAT had any obligation to it. Such a letter was in fact provided by AWADI on 17 October 1995 (see below). It was suggested to Mr Cook in cross-examination that the above minuted request was a quite different matter and was sought to fit with the explanation BHP-IT alleges he had given to Mr Brent concerning the cancellation of STUBS (ie it was cancelled by AWADI). Les Cook insisted there was only one request made. 1281 Mr Nichols, who was the person who actually made the request of AWADI, said in re-examination in evidence I accept that the request was made at the behest of Mr Jones at a meeting shortly after 13 September. Mr Jones gave evidence after he became aware DoD had decided not to proceed that he requested Mr Nichols to contact AWADI to see whether it would give written confirmation that DFAT had no obligation to it in relation to STUBS. 1282 The 17 October 1995 letter was in the following terms: "I refer to your telephone call concerning your Department's legal obligation to proceed with the subject contract. AWA Defence Industries hereby advises that we do not consider the DFAT are under any legal obligation to continue negotiations on the subject contract. Both parties participated in negotiating the draft contract in good faith, however no agreement was reached in relation to the subject document. Your response of 19 Dec 94 to our suggested options (dated 6/12/94 ref A9/512/1) to resolve the way forward indicated we were only able to agree on the purchase of the Untrusted Software. AWADI is therefore of the opinion that DFAT are under no legal obligation to proceed with finalising the subject order. We appreciate your efforts in attempting to resolve the outstanding issues. It is unfortunate that the DoD has decided not to support the development of STUBS. However, AWADI can not support the development unaided. We appreciate your business and look forward to being able to provide solutions for any future needs you may have." 1283 Mr Brent indicated to Mr Cook by letter of 25 September in the context of extension to the contract schedule that BHP-IT had not received "any formal notification of the demise of the STUBS program". That notification was provided by Mr Cook's 26 September letter, the opening sentence of which was that: "I confirm my informal advice to you of 15 September 1995 that AWADI will not continue with the development and supply of the STUBS security devices." 1284 Finally the meetings of 13, 14 and 15 September. I should state at the outset that on the material before me the precise detail of how many meetings there were, who attended them, and what actually was said at them, remains elusive. It is clear that it was communicated to Mr Brent and Roger Cooke that STUBS had been cancelled and that an alternative strategy was outlined. The best evidence I have on the matter is contained in a memorandum of Roger Cooke of 15 September 1995. It does not record Les Cook attributing the cancellation to AWADI. 1285 In cross-examination Roger Cooke conceded, quite properly in my view, that he could not recall accurately whether Les Cook simply said STUBS was cancelled, or whether he explained more fully that AWADI had cancelled STUBS. Mr Brent's evidence was that the cancellation was attributed to AWADI though accepted in cross-examination that he could be wrong on this - as he demonstrably was on other matters relating to the meetings. Les Cook's recollection of the meetings could not descend to detail. He accepted in cross-examination that he could have said something like AWADI had cancelled STUBS and therefore DFAT could no longer supply it. 1286 I should note that Mr Cotton was absent from Australia from 9 to 26 September 1995. The only evidence given by Kim Jones concerning events in September related to his request of Mr Nichols to get a letter from AWADI after he had been advised that DoD had decided not to proceed with STUBS and that AWADI "had decided it would no longer continue with the STUB devices project". And no particular evidence was sought from Mr Skinner about events in September 1995. No witnesses were called from AWADI.
(a) Relevant contractual provisions 1288 Clause 5.1 of the Head Contract required the Commonwealth to take all reasonable measures to maintain the processing environment as constituted by the elements of the CSI. 1289 Clause 5.4 required the Commonwealth to manage the project risks that were identified as its responsibility under the Contract. A variety of provisions in the Head Contract and its Schedules, as has been seen, made the provision of STUBS the Commonwealth's responsibility. 1290 Clause 5.6(a) - which is said to be a specific manifestation of the duty of good faith and fair dealing - provided: "Except where otherwise provided in the Contract the Customer, … agree[s] that in the exercise of any obligation, function or power imposed or conferred on them under this Contract they will: (a) act in a fair and reasonable manner." Clause 10.3 provided: "Where a Party identifies a risk which may have a significant effect on the implementation of the Implementation Plan that Party shall immediately report the identified risk to the other Party and the Party responsible under this Contract for managing the identified risk shall inform the other Party of how it will manage that risk and shall forthwith undertake management of that risk." BHP-IT contends that, in light of these provisions, the Commonwealth was subject to at least the following obligations: (1) in circumstances where at the time it executed the Head Contract the Commonwealth had not entered into any contract with AWADI to enable it to supply STUBS to BHP-IT as CSI, an obligation to keep BHP-IT fully and accurately informed: (a) as to its progress in negotiating such a contract; (b) as to any matters which may present obstacles to the execution of a contract between AWADI and the Commonwealth and which therefore may have given rise to a risk that the Commonwealth may be unable or unwilling to adhere to its obligations to supply STUBS to BHP-IT in accordance with its obligations under the Head Contract; (c) as to any change in the Commonwealth's intentions concerning the supply of STUBS to BHP-IT for the purposes of performing the ADCNET contract. (2) in the event it became necessary or desirable for the Commonwealth to negotiate an amendment to the Head Contract to relieve it from its obligations in relation to STUBS, an obligation to act fairly and reasonably towards BHP-IT in the carrying out of its obligations under the Head Contract, so that BHP-IT was fully and accurately informed of all material matters so that such amendment could be negotiated fairly, at arms length and in a way which would not later disadvantage, or operate unfairly or unjustly against, BHP-IT. (3) to carry out its responsibilities and duties under the Head Contract and to act toward BHP-IT, fairly, reasonably, and in good faith. 1291 The alleged breaches of these obligations resulted from the view BHP-IT invites me to take of what are said to be the improper decisions and actions taken, and the misrepresentations and non-disclosures made, during the period covered in the Factual Setting above. It is for this reason, as I earlier foreshadowed, there are hundreds of pages of submissions advancing rival interpretations of the events, etc, I have narrated.
(b) Factual findings 1292 My own findings on what are said to be key decisions and actions can be stated relatively shortly. By way of preliminary comment, I should indicate that the level of confidence one can have about the accuracy, veracity, or contemporary significance of statements made in documents that have been put in issue is obviously affected by a number of phenomena. The first is that there clearly was a significant degree of personal interaction between personnel of the three principal parties to this proceeding. They were located in the same building; they met regularly; there were obvious professional bonds between some of them; and their relationship had, at least amongst some of the more significant actors - Les Cook, Roger Cooke and Kyrill Brent - extended over some number of years. Though documents are the bricks and mortar of this proceeding, they obviously reflected only a part of the communications between the parties. And they were only one source of their contemporary understandings. Further, the correspondence between the parties reflected, on occasion, requests for, or the making of, formal communications in respect of matters already known or else prompted by prior discussion. The Commonwealth, in particular, has emphasised the importance that should be attributed to this informal process of communication. 1293 What was true of communications between the parties was also evident but to a much more uncertain degree in communications with third parties and, in particular, between DFAT, DoD and AWADI. There is a number of DoD documents, for example, that refer to "informal advice" etc about DFAT's intentions. 1294 The difficulties the above phenomenon raised in this proceeding are compounded by the almost total lack of ordered recall by key actors of much that transpired in the period of present concern. While, for example, there may well have been a simple explanation for an apparent inconsistency between two documents - eg additional oral advice or information was acquired before the latter of the two was composed - the evidence in this proceeding usually goes no further than establishing the inconsistency itself. The concern for me in this is that in some instances in this proceeding that inconsistency is used to attack credit particularly in relation to Les Cook. 1295 I turn to three matters which are, in my view, of general significance to my findings. The first is that both Les Cook and Mr Nichols were champions of Option C and they did not disavow this. From shortly after the entry into the ADCNET contracts, they came to the view that the better outcome for DFAT was that STUBS be abandoned in favour of Option C. Given the opportunity so to do by Mr Cotton's 17 January 1995 request for a paper on "fall back options", Les Cook was enabled to publicise his views in the papers on alternative strategies he was asked to or did prepare. 1296 I am satisfied that in the various papers he wrote he was acting in what he considered were the best interests of the Department. I imply no professional criticism in saying that some significant degree of advocacy is discernible in some of them. I will return below to the criticism made of him that he used information manipulatively to achieve his ends. 1297 This brings me to the second general point I wish to make. Les Cook was not a strategic decision-maker in DFAT. He was a consultant. While he obviously took decisions at the implementation level of the ADCNET contracts, the decisions such as whether STUBS should be adopted or should be abandoned in favour of Option C were not decisions he - or for that matter Mr Skinner - could take and he was aware of this. At best he could influence decision-making, which he did decisively, for example, in relation to the "change of tactics" decision of the IT Executive. 1298 I am satisfied that it was understood at the time that if a decision was to be taken to abandon STUBS in favour of Option B or C, that decision would ultimately be taken by the Senior Executive after recommendation from the IT Executive and the SPC. An important actor in that decision making, as I will indicate, was Kim Jones. 1299 The significance of the Senior Executive being the organ that was to decide whether to adopt an alternative is twofold. First, it alone represented the Commonwealth for the purposes of that decision. But, secondly, that decision apart, it was not the only organ of the Department whose actions could put the Commonwealth in breach of its contract with BHP-IT. I emphasise this because I am satisfied that the Senior Executive did not formally, or informally (ie "by a nod and a wink"), resolve to abandon STUBS in favour of Option C. For this reason the actions of others within DFAT are what are relevant for the purposes of determining whether it committed breaches of contract in the manner in which it performed the Head Contract up until the cancellation of STUBS and the entry into the CR3049 Emulation Variation Agreement. 1300 The third general point I need make is to re-emphasise something I mentioned earlier in this Part. I am satisfied that the principal matter of concern for all relevant DFAT officers in 1995 was the ADCNET project and not the ADCNET contracts. Mr Skinner, for example, agreed with my proposition that, so far as he was concerned, his fundamental responsibility was to administer the ADCNET project and it happened to be that the contract was within it. Mr Nichols agreed that he differentiated between the project and the contract so that he differentiated decisions or action he was taking in relation to DFAT's overall needs (and that applied to what the Department required in the longer term), from those he took in relation to progressing the BHP-IT contract. He did not think that the two were "that tightly intertwined" or that he had "an obligation to advise BHP-IT as to the Department's long-term plans with respect to STUBS, or any other gateway the Department may wish to use". For his part Les Cook saw his "major role as being one relating to the technical work being done and managing the interface to BHP, but not really being managing the contract". It was for other people within DFAT to be more concerned with the contract. Kim Jones, again in response to a question of mine, accepted that he had no useful knowledge of the contents of the ADCNET contract; he was unaware of the obligation in relation to the delivery of STUBS; and that he was not really aware of any of the contractual obligations. 1301 I will comment further on contract management later in these reasons. For present purposes I should indicate that I consider that the attitude to the contract displayed by DFAT officials helps explain their greater concern for what was to be the system they were going to get, than with the system they had contracted with BHP-IT to integrate and which required the purchase of STUBS from AWADI. 1302 Turning to the evidence I should indicate I do not intend to deal with each and every submission made on a document by document basis. Rather I will state findings in the form of conclusions in light of those submissions. 1303 First, some matters have been put in issue on which the evidence is clear and requires the following findings. 1304 1. Though Les Cook indicated in March 1993 that he estimated the number of STUBS devices required would be 1000, that estimate had been reduced dramatically prior to the execution of the ADCNET contracts. I am satisfied that BHP-IT had some appreciation that there had been a reduction, though I do not consider that the evidence justifies a finding on my part that prior to the execution of the ADCNET contract it had precise knowledge of the number which DFAT then contemplated purchasing. I am satisfied, though, that for reasons given in the next paragraph in relation to deployment only in Canberra, BHP-IT could not reasonably have expected that that number would be large. 1305 2. It had been decided well before September 1994 that the STUBS devices would not be used at overseas posts. It is probable that that decision was taken for reasons of cost and that of itself reduced significantly the possible number of STUBS devices DFAT would need to acquire. This decision was reflected in the relevant FRS requirements. 1306 3. Prior to the execution of the ADCNET contracts the parties were addressing the issues of whether AWADI would be able to provide STUBS devices at all, or (production devices) on time. By February of 1995, BHP-IT and GEC Marconi were informed by Les Cook that STUBS might never be available; that he was "considering other options" and would keep them "informally advised and raise CR's for any work to build emulators or (worst case) rework of security policy": Mr Wishart's 20 February 1995 report. Discussions about the availability of STUBS (late or at all) were recurrent in project management meetings prior to mid-June: Mr Brent's 18 May 1995 letter; and the status of STUBS had been a standard subject item for those meetings since 29 March 1995. 1307 4. By mid-May 1995 BHP-IT was aware that there were meetings to be held involving discussions between AWADI, DFAT and DoD about STUBS which could lead to the STUBS program being "cancelled within AWA": Mr Brent's 15 May email and 18 May letter. By mid-June 1995 Mr Brent had been informed that DFAT was itself considering whether to proceed with STUBS or to return to an approach in which the PSI implemented boundary security and that DFAT might decide that "STUBS [was] not practical or economic": Les Cook's 2 June and 6 June 1995 letters. 1308 5. I am in consequence satisfied that BHP-IT had been made aware by mid-June 1995 (and probably much earlier) that either AWADI or DFAT might decide not to proceed with STUBS and that the Commonwealth still did not have a contract with AWADI. I deal further with this matter below as bears on the expectation BHP-IT could reasonably have entertained of a cancellation by DFAT. 1309 By way of comment, in circumstances in which there was no contract with AWADI and in which price per unit was escalating ($34,000 in May: Nichol's 17 May minute; circa $42,000 in June: AWADI letter of 5 June), it is unsurprising that DFAT had flagged at least possible cancellation by it on affordability grounds. STUBS was CSI and the ADCNET contracts envisaged the possibility of changes to CSI. 1310 A central part of BHP-IT's case is that in late June or early July the Senior Executive endorsed the IT Executive's "change of tactics" decision and that the IT Executive then put that decision into effect. The evidence, it is alleged, demonstrated that in early June 1995 and prior to the "change of tactics" decision, the IT Executive had determined to cancel STUBS and to replace it with Option C but between 17 and 22 June it decided to adopt the change of tactics for the reason given by Les Cook, ie so that DFAT would not lose its strong contractual position in relation to contract negotiations. 1311 I am then asked to find (i) that on 22 or 23 June 1995, the IT Executive resolved to recommend to DFAT Senior Executive on 26 June, 1995, that: (a) for practical reasons associated with the maintenance of DFAT's strong contractual position vis-ŕ-vis BHP-IT, it was preferable for the Senior Executive to defer a final decision to replace STUBS with Option C until after the completion of the Release 3 Head Contract, or, alternatively until after Defence had made a formal decision whether or not to purchase STUBS from AWADI; (b) in the meantime, no steps would be taken to commit to the purchase of STUBS for the purposes of the Head Contract, regardless of the provisions of the Head Contract; (c) BHP-IT should be told to proceed with completion of the ADCNET contract on the basis that STUBS would be supplied, albeit late, and should be held to delivering under the current timetable and to the current functionality specified in the Head Contract; (d) the Senior Executive informally communicate to the IT Executive its intention to endorse Option C (or a derivative thereof) as the security device for use in conjunction with the ADCNET software, in preference to STUBS, so that future DFAT time and effort could be allocated appropriately. (ii) that on 26 June 1995, (or possibly at a meeting of the Senior Executive held between 26 June and 17 July) the Senior Executive was informed of the matters referred to in the preceding sub-paragraph and endorsed the approach therein set out; and (iii) that on 5 July 1995, and following the 26 June meeting of the Senior Executive, the IT Executive resolved to implement the decision of the Senior Executive by: (a) proceeding with completion of the Head Contract without STUBS but as if STUBS were available (ie would be supplied to BHP-IT); (b) telling BHP-IT that the DFAT intended to use STUBS and that STUBS was coming; (c) keeping tabs on AWADI and Defence in the interim. 1312 For my own part I do not consider that the evidence quite accords with BHP-IT's contention. I make the following findings. 1313 (a) Prior to the "change of tactics" decision in late June/early July 1995, neither the Senior Executive nor the SPC had determined that Option C be adopted irrespective of whether STUBS would be available. The SPC had taken up the issue of "the security-functionality trade off" at its special meeting of 26 April 1995. While expressing the view that, if STUBS was available, it probably should be persevered with, the SPC confirmed that DFAT would nonetheless need to determine whether STUBS should be used given the arguments for and against security assurance and user functionality. The 25 May SPC meeting did not materially change the 26 April "decision". It was noted though that the time frame for building an alternative to STUBS into ADCNET had passed and that the design of STUBS had gone too far to abandon the project. I do not think that particular significance can be attributed to either of these two matters but particularly the first. It is not clear whether what was being referred to was that it was too late to build in an alternative during the currency of the ADCNET contract, or, in contrast, for the ADCNET project itself. The former seems the more likely. The 19 June Senior Executive meeting which discussed (inter alia) matters raised in the minutes of the SPC 26 April meeting simply noted the matters on which decision would be required in the near future. 1314 (b) The IT Executive's function in relation to the abandonment of STUBS from 6 June 1995 was, like the SPC's, that of making recommendations. Until the change of tactics was endorsed it was probably moving towards recommending STUBS be abandoned. I am not satisfied that it ever formally reached or was required to reach, that position. Its evolving view was overtaken by the change of tactics proposal. 1315 (c) There were two other significant events in early June. They were (i) the DSD advice that STUBS be used if it was available and it was practical to deploy it in sufficient numbers, and (ii) Mr Jones' request for legal advice on the Commonwealth's possible liability to AWADI. 1316 (d) The 22 June change of tactics proposal to the IT Executive was not a happily crafted document. I am not satisfied that it evidenced a proposed decision by the IT Executive that STUBS be abandoned in favour of Option C. The requested legal advice from the Attorney-General's Department had not been obtained and DoD's intentions in relation to the purchase of STUBS had not been formally provided to DFAT. While the proposal was cast in the form of four options, its intention was to secure the deferral of any decision until September when Defence's intentions were "firm". 1317 (e) The change of tactics proposal sought an "indication [from the Senior Executive] of the likely decision [as it] would be helpful … in determining the degree of DFAT effort to be expended in testing the STUBS interface software or defining the changes required for option C". If this was to be understood as soliciting an informal communication of an intention to endorse Option C, I am not satisfied that such a communication was made by the Senior Executive. 1318 (f) I have already indicated that I infer Mr Jones mentioned the change of tactics proposal at the Senior Executive meeting on 26 June. Whether or not the Senior Executive took a decision in light of the proposal at that meeting is not a matter upon which a positive finding can be made. What is clear is that at some time between 26 June and when the Administrative Circular was issued on 17 July 1995, the Senior Executive acted consistently with the proposal to the extent at least of deferring "a decision on the long term usage of Stubs until the availability and affordability becomes clearer later this year": the 17 July Administrative Circular. Mr Cotton, while having no clear recollection of any Senior Executive meeting where the proposal was acted upon, gave evidence as to his state of mind at the time that was consistent with such a deferral decision being made. 1319 (g) I consider it improbable that a positive decision was taken, even on an informal basis, to adopt Option C whether or not STUBS was available. The change of tactics proposal itself and the tenor of the DSD advice (on the premise that STUBS was available) were both calculated to induce deferring a decision cancelling STUBS from the ADCNET project until September when DoD's intentions were known. (I will return below to why I have emphasised "project" and not "contract" here.) The lack of formal legal advice until 6 July 1995 on possible liability to AWADI is another influence which I consider would have been likely to have induced real caution in taking a cancellation decision prior to that date. I equally am satisfied that actions taken by, and inter - and infra - departmental communications made by, DFAT officials subsequent to 17 July 1995 are inconsistent with a cancellation decision having been taken: eg Mr Nichols 21 July exploration of the purchase of AWADI prototypes; and the 18 July ADCNET Security Sub-Committee meeting. I find, then, that in late June/early July no decision was either taken or was foreshadowed (i) that STUBS was to be cancelled; or (ii) that Option C would be adopted in any event. The decision taken was the deferral of a decision either to approve or to cancel STUBS from the project. That decision had a number of practical consequences. The first was that there was no possibility of STUBS devices (or even prototypes) being available for delivery on 1 August 1995 as required by the contracts. The second was that it created a positive incentive not to commit to a procurement contract with AWADI until DoD's intentions were known even if the opportunity to do so was there. Mr Skinner's 6 July letter to DoD reflected this. Thirdly, it allowed for the possibility of STUBS being either implemented during the ADCNET contracts (depending on both schedule extensions and STUBS availability) or retrofitted after acceptance testing, if it actually became available. 1320 Insofar as the immediate performance of the contracts was concerned, the course endorsed by the IT Executive and taken by DFAT vis-ŕ-vis BHP-IT was to proceed with the ADCNET contract "as if" STUBS would be available. In so doing it pursued a course of conduct that kept BHP-IT uninformed of what DFAT's actual intentions were in relation to the procurement of STUBS from early July until STUBS was cancelled on 13-15 September. 1321 This brings me to the second major factual matter in the contract claim. It relates to how DFAT conducted itself in the performance of the ADCNET contract in relation to its obligation to provide STUBS. The background fact is that the Commonwealth did not meet any of its contractual obligations in relation to STUBS CSI either on time or, save for the STUBS SIS, at all. 1322 Turning first to the period from the execution of the ADCNET contracts until the "change of tactics" decision, I have already found that (i) DFAT had made the parties aware from early in the life of the contracts that there was an issue as to whether AWADI would be able to supply STUBS on time or at all; and (ii) by mid-June, BHP-IT had been informed that AWADI or DFAT might decide not to proceed with STUBS and affordability was a possible reason for DFAT so doing. I would add to this that, as the minutes of the Project Management Committee meeting of 29 March 1995 record, the status of STUBS was considered to require "constant monitoring" and was made a "standard subject item" at future meetings. That this in fact occurred is reflected in the opening observations of Mr Brent's 18 May 1995 letter. 1323 Notwithstanding the disclosure I have found was so made, BHP-IT has alleged that from January 1995 DFAT was not, in its negotiations with AWADI, taking any real steps to conclude a contract for the supply of STUBS. Insofar as this allegation relies upon DFAT having acted in late November-early December in a way that created an impasse in negotiations (arising in particular from its demands in relation to risk allocation for E5 accreditation and late accreditation), the alleged state of affairs is not borne out by the evidence. AWADI's own appreciation of the state of negotiations on 18 January 1995 was that the "ball [was] firmly in [its] court", and that it had to "finalise the prices to be offered". Those prices were not supplied until 5 June 1995 although indicative prices were supplied to DFAT on 10 May at a meeting involving AWADI, DFAT and DoD. 1324 It may be said that DFAT was not solicitous in attempting to extract a pricing response from AWADI. It cannot be said that it had, in reality, ceased to negotiate from December 1994 - though doubtless the IT Branch was not displeased at the rate at which AWADI was proceeding. However, after the change of tactics decision a quite different state of affairs obtained. AWADI had by then provided its price schedule to DFAT but, as I have found, DFAT had now determined not to commit itself to the purchase of STUBS until DoD's plans were firm and AWADI's terms and conditions were known. The former of these contingencies was not expected to occur until September 1995. 1325 From early in the ADCNET contracts the use of emulation for acceptance testing of the R3 software had been raised. The change of tactics decision, as implemented by DFAT, necessitated the formalisation of emulation as part of the ADCNET contractual arrangements. I am satisfied that this was done by DFAT in a way calculated to create the impression that for its part DFAT intended to use STUBS in the ADCNET project. I equally am satisfied that when presented with opportunities to reveal DFAT's actual intentions in relation to the STUBS procurement (ie deferral of any decision), DFAT officers avoided doing so. 1326 The minutes of the ADCNET Acceptance Test Status meeting of 7 July recorded that "PSI is still unaware of DFAT official position on STUBS. [Mr Nichols] to provide PSI with advice in relation to the go ahead with the emulation of STUBS for testing". The latter advice was given on or before 12 July, BHP-IT having been instructed to go ahead "on [the] assumption STUBS is available": note of BHP-IT/GEC Marconi meeting of 12 July 1995. The 24 July minutes of the Acceptance Test Status meeting note that DFAT still had not indicated its official position on STUBS. 1327 Contemporary notes, or communications, made by GEC employees provide reliable indications of what was being communicated unofficially by Mr Nichols. An email from Mr Cartwright to Mr Harris of 25 July 1995 reporting on the 24 July meeting (above) stated: "The issue regarding the STUBS device is apparently resolved and the device itself will be used". Mr Wishart, who was not an attendee at the 24 July meeting, reported to his project management team on 24 July that "rumour from R [Nichols] that STUBS is now a goer". It will be recalled that on 21 July 1995 Mr Nichols saw the demonstration of the STUBS prototype. 1328 Mr Nichols had no actual recollection of what he said at the 24 July Acceptance Test Status meeting but he denied that at that time he would have said that it was DFAT's intention to use STUBS devices in the ADCNET project. I do not accept this disavowal. I accept that statements of the type attributed by Mr Cartwright and Mr Wishart to Mr Nichols were made by him. 1329 The minutes of the 31 July 1995 Acceptance Test Status meeting note that DFAT's official position had by then been given, though the minutes do not describe it. I am satisfied that Les Cook's letter to Mr Brent of 25 July 1995 under the heading "Supply of Stubs Devices for Acceptance Tests" was, and was intended to be, DFAT's communication of that official position on STUBS. 1330 In advising in that letter that emulation was to be used for acceptance testing and a change request would be raised accordingly, Les Cook clearly conveyed that it was only because it was "not possible to provide sufficient STUB devices" that emulation was necessary. This was a colourable representation and he must have appreciated that at the time. It suggested that the Commonwealth had affirmed its intention at that time to acquire STUBS and would have reasonably been so understood by BHP-IT. I do not consider the representations so conveyed were undercut by the 17 July Administrative Circular which was provided to Mr Brent. Whatever Mr Brent derived (if anything) from that general communication, this letter was a direct communication to him as project manager from DFAT's project manager. It was the awaited statement of "official position". And it confirmed what was being said unofficially at the time. 1331 There was no documentary communication to BHP-IT thereafter until the 26 September letter that qualified or negatived the representations made in this letter. The formal communications made on schedule extension and on emulation on 10 and 24 August 1995 are quite consistent with the continuation of the representations I have noted. 1332 Mr Skinner gave the following oral evidence - not reflected in any contemporary document notwithstanding its contractual significance - of meetings with BHP-IT personnel (Mr Brent and Mr Dean) between July and September 1995: "A. I recall clearly advising BHP that the Department was taking the best steps it could to ensure that it met its contractual requirements, but that in relation to the STUBS deliverables we were dependent upon entering into a contract with AWADI which, in turn, was dependent upon Defence making a decision about whether it would proceed with STUBS. We had been pushing Defence for a decision for some time, as had AWADI and Defence had promised us that they would be making a decision at some point in time and that date had changed a little - August, September, October." 1333 I have already indicated my view of the reliability of Mr Skinner's evidence generally. I consider the above wholly unreliable. I agree with BHP-IT's submission that the clarity of recall here is in complete contrast with his evidence generally. While I acquit him of being deliberately untruthful, I regard this evidence as an invention. 1334 Finally, the cancellation of STUBS. I should state that the evidence is remarkably slender on DFAT's decision-making on this matter after DoD's indication it would not be proceeding with a STUBS procurement. I accept that Kim Jones was not involved in any decision to cancel in September and that he had been advised (inter alia) that AWADI had decided to cancel STUBS. I also accept that the letter he directed Mr Nichols to obtain from AWADI that DFAT had no legal obligation to it was the only letter sought from AWADI at that time. I consider no weight should be given to the minute of the ADCNET Security Sub-Committee of 22 September 1995 which might in its language suggest that a further letter was sought. 1335 I have already noted that Mr Cotton was overseas at all relevant times in September. Whatever was the decision that was made within DFAT, it was made by persons in the IT Branch. The Commonwealth has not sought to demonstrate the contrary. I should add I do not accept the suggestion in Mr Cook's evidence in cross-examination that the decision to cancel was taken at an IT Executive meeting held sometime shortly prior to the 26 September letter, that decision being that the Department had no choice after DoD's decision not to proceed. Mr Cook later conceded he had no clear recollection of this meeting and its occurrence is not otherwise supported by documentary evidence. 1336 I am satisfied that Mr Skinner, Mr Nichols and Les Cook did not collectively or individually take a positive decision to cancel STUBS from the ADCNET project simply because DoD had decided not to proceed. Given the history of the "deferral decision" and the known responsibility of the Senior Executive to make a decision once DoD's intentions were known, I find it wholly improbable that these officers would have presumed to arrogate to themselves a decision they knew belonged to the Senior Executive. I regard evidence given by Les Cook disputing the Senior Executive's continuing role in the matter at the time as being illustrative of his argumentativeness in cross-examination and as being entitled to no weight. 1337 Given that all relevant communications were made by Les Cook, the bases of his actions are of no little importance. However, his oral evidence concerning his state of mind at the time is both contradictory and confused. This difficulty is overarched by his lack of recall of the detail of the 13-15 September meetings. I do not intend to recount that evidence other than to say that he did indicate that STUBS was cancelled on 13-14 September and that he stated in cross-examination that (i) the "no STUBS" decision was made later than those dates; (ii) on those dates STUBS was still just possibly available to DFAT; and (iii) he personally did not have the power to decide whether DFAT would pursue the procurement of STUBS, DoD's decision notwithstanding. 1338 DoD's decision, as I indicate below, was of significance in evaluating just how "live" was the possibility of STUBS remaining available to DFAT. Les Cook's view was that at 13-15 September there was "a slight possibility it was not dead". This view, which probably reflected his own appreciation of the matter at the time, is also reflected in my conclusions on his actions on 13-15 September. 1339 I make the following findings. (i) Les Cook did tell both Mr Brent and Roger Cooke at the 13-14 September meeting that STUBS had been cancelled. The most reliable evidence of this fact is Roger Cooke's 15 September memorandum. (ii) I infer that in so doing he presented as a fait accompli what he appreciated would be the predictable outcome of DoD's decision, and he did so while aware of AWADI's provisional offer to DFAT of 13 September 1995. (iii) I infer that he made some reference to AWADI and that what he said was reasonably capable of creating the understanding that it was AWADI that had cancelled STUBS; (iv) I also infer that he felt confident in making the cancellation communication because he was taking no positive decision in the matter. He was merely voicing what he considered was an inevitable outcome, ie DFAT would not have to make a cancellation decision. (v) A reason this communication was made was so that the "STUBS replacement" issue could be included in the contract negotiations for a schedule extension: Roger Cooke's memorandum. The schedule extension negotiations were of real moment in August/September 1995. It is a moot point whether, consistent with the reasons underlying the change of tactics decision, the secretiveness demonstrated by DFAT about disclosing that decision to BHP-IT was related in any way to those negotiations. I make no finding on that matter. 1340 The 26 September letter confirmed Les Cook's "informal advice … of 15 September that AWADI will not continue with the development and supply of the STUBS security devices". This letter was a response to Mr Brent's 25 September request for "formal notification of the demise of the STUBS program". 1341 It is clear that between the 13-15 September meetings and the 26 September letter the appreciation developed, and was acted upon, within DFAT that STUBS was no longer part of the ADCNET project. For example, the ADCNET Security Sub-Committee meeting of 22 September addressed the issue of boundary security as involving a choice between Option C and a new option, Option D. And Kim Jones' evidence is that after being told both of DoD's decision and of AWADI's decision to cancel STUBS, he sought the "no legal obligation letter" from AWADI. How the above appreciation developed and why DFAT officials acted confidently upon it is by no means clear. 1342 One can reasonably infer that after its communication to DFAT on 12 September, the DoD decision was made known to, amongst others, Kim Jones, Mr Skinner and Mr Allen. The knowledge that was possessed in DFAT of AWADI's intention and circumstances prior to the 26 September letter is far from clear. 1343 On 13 September AWADI indicated to DFAT that it would advise it of "indicative new pricing" for the 50 units it "may be willing to manufacture … for DFAT". No such advice was given. No later manifestation of such willingness occurred. On 14 September, the "STUBS Closedown Plan" was directed to be put into effect, 30 September being the close down date. This, I infer, explains why the pricing advice was never forthcoming. While between 11 and 13 September, AWADI may have been acting with some little optimism about achieving a "return" on STUBS (as is evidenced in its managing director's proposals memorandum of 11 September and the "offer" to DFAT), its conduct from 14 September was consistent with its seeking to procure recoupment from DoD of costs incurred on the STUBS project. 1344 I am satisfied that from or shortly after 14 September AWADI had in fact cancelled STUBS. However, I am not prepared to infer that such a decision was conveyed explicitly by AWADI to DFAT. In the absence of evidence of how any actual decision was made by DFAT that STUBS was no longer to be used in the ADCNET, the reasonable inference to be drawn is that it was assumed within DFAT that DoD's decision spelled the end of the STUBS project for all practical purposes and DFAT officials acted accordingly. When Les Cook wrote the 26 September letter, AWADI was not continuing with the STUBS project.
(c) Conclusions: Contract Claim 1345 I have already rejected those essentially defensive claims made by BHP-IT that are based on the non-provision of STUBS and the non-payment of Milestone 4000. My concern here is with whether, in light of my findings, the Commonwealth acted in breach of cl 5.6(a) and cl 10.3 of the Head Contract. The former provision obliged the Commonwealth to act in a fair and reasonable manner in the exercise of any obligation, function or power it had under the contract; the latter required it to report to BHP-IT "immediately" any risk which might have a significant effect on the Implementation Plan and to inform BHP-IT of how it would manage that risk. 1346 I am satisfied that, in the manner in which it conducted itself from around the time of the change of tactics decision in June 1995 until its formal notice of the demise of STUBS in the 26 September letter, the Commonwealth acted in breach of both obligations. However, I am not satisfied that its conduct prior to June 1995 was similarly wrongful. 1347 First, the period to June 1995. The disclosures DFAT made to BHP-IT concerning the status of STUBS, the possibility of its cancellation by either AWADI or DFAT and the need to make a decision whether it was to proceed with STUBS, were sufficient in the circumstances to protect it from falling foul of the above provisions. 1348 A duty to act fairly and reasonably in performing one's functions is not breached simply because it can be shown that something could have been done more openly, more expeditiously or in a more effective way. Clearly the Commonwealth could have so acted and most obviously so (a) in pursuing AWADI about the price of STUBS prior to June 1995 and (b) in reaching a decision on proceeding with STUBS, such a decision being foreshadowed on a number of occasions from as early as 29 March (the representations were that it would be made within "two" or "four" weeks). What is required to be shown is that it acted unfairly or unreasonably. 1349 If it had been made out that the Commonwealth had in its performance of the contract in this period acted in a manner other than that which BHP-IT was entitled to expect of it, I would have found it to have been in breach of cl 5.6(a). In formulating the matter in terms of reasonable expectations, I wish to draw attention to the important roles that the nature and purpose of the contract itself and the evolving relationship of the parties can have on setting the standard by which to judge whether one party's conduct can properly be characterised at a particular point in time as unfair or unreasonable. 1350 Whatever the Commonwealth's sins of commission and omission in this period I do not consider that its conduct had been so unfaithful to the parties' bargain as to be unfair. Neither do I consider that the Commonwealth acted unreasonably. 1351 I am similarly of the view that it sufficiently identified the "STUBS availability" risk during this period - so much so that from the end of March 1995 the status of STUBS was a standard item at project management meetings. Its dilatoriness in taking its foreshadowed decisions about STUBS probably reflected DFAT's primary concern with the ADCNET project not the ADCNET contract. Nonetheless, I consider that so far it had sufficiently complied with the requirements of cl 10.3 in the circumstances. In saying this, I do not overlook that in his 18 May letter, Mr Brent foreshadowed the need for action "to contain significant and costly delays". By the end of May the time for action to manage the "STUBS availability" risk had arrived. That is a matter relevant to my finding of a breach of cl 10.3 in the period from June 1995 to September 1995. 1352 Turning now to that period, the change of tactics proposal and its implementation crystallised a change in the relationship of the parties. To avoid having to raise a change request for a replacement for STUBS so giving "the PSI a lever to prise open a large extension of schedule and consequent cost increase", a course was taken which resulted in deception being practised on BHP-IT. It involved, first, deferring any decision until September - this was quite contrary to the expectation Les Cook created in correspondence that a decision was soon to be taken (eg in his 6 June letter to Mr Brent); secondly, not then disclosing that such a deferral decision was taken; thirdly, securing the agreement of BHP-IT to the use of emulation for acceptance testing; and fourthly, later fostering the expectation that it was DFAT's intention to acquire STUBS. While different DFAT officials participated in different parts of this process - and those who participated in the first (eg Kim Jones and Mr Cotton) may well have been unaware of the later steps taken - the outcome of their collective actions was as I have put in précis form above. 1353 BHP-IT was, in light of communications made from 29 March 1995 onwards but particularly in light of the 6 June letter, entitled to expect that DFAT would take a decision on the use of STUBS or an alternative in June and that this would be communicated to it. It was equally entitled to expect that, if DFAT decided to defer a decision on whether it would even acquire the CSI it had contracted to provide, it would be informed of that decision because of its possible effects on GEC Marconi's performance of the Sub-Contract hence its own performance of the Head Contract. 1354 Emblematic of the reason for the latter entitlement was the request made in Les Cook's 22 June own minute to Kim Jones that an indication be given of the likely decision to be taken as that "would be helpful … in determining the degree of DFAT effort to be expended in testing the STUBS interface" etc. He was seeking what was being denied to BHP-IT. It was being committed to a course that was likely to result in significant and costly delay and it was neither informed of this or given the opportunity to engage in discussions with DFAT and GEC Marconi about how the deferral decision should be managed. 1355 Consistent with what I have earlier said, I attribute DFAT's conduct in part to a mentality quite unattuned to contract management - hence Mr Nichol's view that he had no obligation to advise BHP-IT of DFAT's long-term plans with respect to STUBS. However, I also attribute the conduct of those in IT Branch and particularly Les Cook to an apprehension that openness with BHP-IT could prove costly to the Department. Covert action was engaged in in relation to its own contractual obligation so as to maintain what was perceived to be a contractual advantage in not having to engage in negotiations for a replacement for STUBS. BHP-IT was being dealt with unfairly. The Commonwealth was acting without regard to the interests of BHP-IT in the matter. Fair dealing required otherwise. There is a real curiosity in the course of secretiveness taken by DFAT. If STUBS was later to be cancelled before acceptance testing of the R3 software - as in fact transpired - a deferral decision would be likely in any event to lead to consideration of another option and the raising of a change request - as in fact happened. This would result in the very event occurring that the change of tactics was designed to avert. And so CR 3057 was raised. 1356 In the manner in which the change of tactics was put into effect, the Commonwealth breached cl 5.6(a). It misrepresented its own intentions in relation to its contractual performance (ie the acquisition of STUBS); in the deferral decision, it falsified expectations it had created in relation to the taking of a decision concerning the STUBS acquisition without informing BHP-IT of this; and it acted improperly to advance its own interests without regard to the interests of BHP-IT and to which, as a matter of fair dealing, it was obliged to have regard. The Commonwealth's actions related to the manner in which it would perform its functions under the Head Contract and they were unfair. 1357 I would add that, though the case has not been put on the basis of a breach of the implied duty of good faith and fair dealing, the Commonwealth's action would clearly have fallen foul of that duty. 1358 Secondly, as the deferral decision bore on whether STUBS would be acquired or another option be pursued, it related to a risk that might have a significant effect on implementation of the Implementation Plan. The Commonwealth did not immediately notify BHP-IT of that risk. It acted in breach of cl 10.3 of the Head Contract. 1359 Distinctly, Les Cook's 26 September 1995 letter confirming that AWADI would not supply STUBS was, on my findings, true as far as it went. It did not on its face indicate the reason why AWADI had so acted, ie that DoD was not proceeding with STUBS. Against the background of the continuing misrepresentation that had been made concerning DFAT's intention in relation to STUBS, it may be said that there was a distinct lack of candour in Les Cook's communication if he created the impression that the cancellation decision was AWADI's alone and that it was uninfluenced by DoD's decision. 1360 I am not satisfied, though, that such lack of candour would have had independent contractual significance for present purposes. All parties were aware that the Commonwealth in two different manifestations, ie DFAT and DoD, was interested in procuring STUBS. Those two departments furthered differing aspects of the public interests served by the Commonwealth, ie foreign affairs and defence. Though BHP-IT was formally dealing with the Commonwealth in the ADCNET contract, it was perfectly well aware that it was dealing with the Commonwealth in the discharge of its foreign affairs responsibilities. It was for this reason that the intentions of DFAT were the operative intentions of the Commonwealth in relation to matters affecting the ADCNET contract. 1361 The furtherance of the Commonwealth's defence responsibility was no part of the ADCNET contract. Though a bona fide defence-related decision may (as here) have impacted upon the Commonwealth's ability to perform some part of the ADCNET contract, BHP-IT in dealing with the Commonwealth was not reasonably entitled to expect that the Commonwealth would not so act in discharging its defence-related responsibilities - even if this put the Commonwealth in a breach of the ADCNET contract or rendered part of its performance impossible. BHP-IT equally was not entitled to expect that in the conduct of its defence responsibility the Commonwealth would have regard to an aspect of its foreign affairs responsibility, ie the performance of the ADCNET contract. 1362 The DoD decision may have been the practical cause of AWADI's cancellation of STUBS. However, for the reasons I have given above, I do not consider that its taking rendered the conduct of the Commonwealth unfair or unreasonable in relation to its obligation to supply STUBS under the Head Contract. That decision ensured that the Commonwealth remained in breach of its obligation to supply STUBS. But the obligation in cl 5.6(a) of the Head Contract did not disable the Commonwealth from taking that decision. In that sense, the decision was a risk born by BHP-IT. Les Cook's communication of the consequence of the decision was, in contractual terms, no more than the communication of a fait accompli. Whether or not it was misleading or deceptive, it did not attract the operation of cl 5.6(a). The communication did not relate to the exercise of a contractual function. It reported a fact whether or not Les Cook actually knew that STUBS had been cancelled by AWADI. For the same reason it did not attract the operation of cl 10.3 of the Head Contract. 1363 It is unnecessary to consider the consequences that flow from the breaches that I have found. As I earlier indicated, BHP-IT has not sought to identify any loss of damage attributable to them alone.
(1) "Carrying on a Business" 1369 BHP-IT's contention is that, by entering into the ADCNET contracts to obtain the ADCNET software, the Commonwealth was engaged in the systematic commercial activity of developing, obtaining, supplying and marketing a secure communication system and the intellectual property that was integral to it.
(a) Applicable Principles 1370 The volume of recent case law on s 2A's "carrying on a business" requirement, and the binding character of the decision in NT Power Generation v Power & Water Authority [2002] FCAFC 302, relieve me of the need to consider this matter at any length: see also Sirway Asia Pacific Pty Ltd v The Commonwealth of Australia [2002] FCA 1152. I need only note the following: 1371 (1) In the context of the TP Act, "carrying on a business" is intended to refer to activities undertaken in a commercial enterprise or as a going concern: Corrections Corporation of Australia Pty Ltd v Commonwealth of Australia (2000) 104 FCR 448 at [12]; NT Power Generation, above at [85], [88]. 1372 (2) While repetition, system and regularity are indicia of carrying on a business, they are not on their own sufficient to compel a conclusion that such is the case: Sirway Asia Pacific Pty Ltd, above, at [60]; there must be present some element of commerce or trade such as a private citizen or trader might undertake: RT & YE Falls Investments Pty Ltd v State of New South Wales [2001] NSWSC 1027 at [78]. "What is a sufficient degree of commerciality is a question of fact": ibid; Paramedical Services Pty Ltd v The Ambulance Service of New South Wales [1999] FCA 548 at [86]. 1373 (3) Engaging in an activity on a single occasion or only as an ad hoc response to an infrequent occurrence or circumstances, will not normally indicate that a business is being carried on: RT & YE Falls Investments Pty Ltd, above, at [78]: JS McMillan Pty Ltd v The Commonwealth (1997) 77 FCR 337. 1374 (4) Where particular activities of the Commonwealth constitute the carrying on of a business, the ambit of those activities must be examined to see whether the impugned conduct was engaged in as part of, or in the course of, the carrying on of that business: JS McMillan Pty Ltd, above, 356-357; NT Power Generation, above, at [87]. 1375 I would merely add that it is not now open to me to countenance the suggestion that s 2A should be construed expansively in favour of those dealing with the Commonwealth, so limiting the immunity that would otherwise be enjoyed by the Commonwealth: see generally Seddon, Government Contracts, [6.11]ff (2nd ed); Seddon "Crown Immunity and the Unlevel Playing Field" (1998) 5 Agenda 467. It is appropriate, though, to note again the obvious anomaly of the s 2A requirement. Government contracting (in procurement and otherwise) is of major significance in the economic life of this country, as it is in most countries: Arrowsmith et al, Regulating Public Procurement, 7. It is somewhat surprising, that when the State enters the market place to acquire goods or services, it should exempt itself from those norms of conduct considered appropriate to the conduct of trade and commerce that it has imposed upon the private sector as of course - the more so given the "business-like" manner in which the Executive government commonly professes it conducts its affairs both internally and in its dealings with the community.
(b) Factual Setting 1376 The evidence on this matter is particularly sparse. 1377 I have referred both to the origins of the Diplomatic Communications Network and of the ADCNET project in the "General Chronology" in Part I. I will not repeat what I said there. 1378 On 30 April 1992, the then CEO of BHP-IT wrote to the Minister for Trade and Overseas Development concerning the anticipated issue by the Canadian Government of a Request for Tenders for the development of a global diplomatic communications network similar to that of DFAT. The letter went on to say: "We seek your endorsement to the concept that we, together with the Department of Foreign Affairs and Trade, examine whether it is sensible for us to tender jointly for the Canadian opportunity on the basis that: . on a commercial basis the Department would assign licencing rights for intellectual property which has been derived from the ADCNET project and which is not prejudicial to Australia's national security interests; . the Department would contribute other material and human resources as agreed; and . BHP Information Technology would provide Prime Systems Integration services in a manner similar to that for ADCNET." 1379 The Minister's reply of 16 June 1992 stated, in part: "As part of the ADCNET Project, the Department has conceived and, with the assistance of BHPIT, is developing several secure Information Technology products which may have a market with agencies of friendly governments. While these products will not be in operation for some time, it would be prudent to keep potential markets informed of the capabilities and availabilities of the products. It is also important to advise potential markets of the added value that Australian industry, such as BHPIT, can provide in the form of Prime Systems Integrator and other services. I am advised that discussions, along the lines you suggested, have occurred between staff of my Department and BHP staff and as a result a combined presentation will be made to the Canadian Department of External Affairs in Ottawa on 25 June. I support this initiative by the Department and BHPIT in marketing Australian technology overseas and wish you well in your venture." 1380 In mid-1993 DFAT undertook to show ADCNET to Defence International Projects Branch. Mr Skinner's evidence was that, while not recalling having dealings with that Branch, he could recall that demonstrations were given to DoD in the early 1990s. 1381 On 11 May 1994 DFAT sent a memorandum to all Government Organisations using ADCNET. The object of the memorandum was to explain the changes to be wrought by the ADCNET redevelopment project. It indicated that several new services would be offered to users "at charging rates lower than those available from commercial suppliers". It also indicated what its "charging policy" would be. 1382 In March 1995 Australia co-hosted the CeBIT Hanover Computer Fair. DFAT was to have a stand at it demonstrating, with reference to ADCNET, that Australia had the capability to develop and implement large, complex IT systems through partnerships between government and industry. 1383 In April 1996 BHP-IT made a request to DFAT to demonstrate "ADCNET functions" at the Australian High Commission in Malaysia. The purpose of this was to allow the Malaysian Foreign Ministry and BHP-IT to explore the possibility for a contract under which BHP-IT would provide to the Malaysian Government services similar to those it provided to DFAT in the ADCNET project. 1384 The evidence as it related to STUBS was as follows. The STUBS concept was developed in 1989 and research and development into it was then undertaken by DSTO. In February 1993 the Commonwealth entered into an agreement under which it licensed STUBS intellectual property to AWADI. The recitals to the agreement indicated that AWADI would use its best endeavours to further develop, manufacture and market STUBS "to the Australian Defence Forces and other markets": emphasis added. The Commonwealth had previously filed a provisional specification for a patent for such STUBS technology as it had developed. 1385 In late 1996, the Commonwealth entered into a similar licensing agreement with Vision Abell Pty Ltd in relation to information security technology ("Starlight") it had developed after STUBS. The background to this agreement was that the Commonwealth wished to develop an Australian based industry capability in the area of information security. The Commonwealth at the time foreshadowed that it might itself need to purchase information security equipment based on Starlight. Vision Abell Pty Ltd was the vehicle of a consortium that included BHP-IT. 1386 The Commonwealth acquired the intellectual property rights to STUBS and the STUBS prototypes, etc from AWADI in June 1996 for $2.6 million. There is no evidence that anything further was done in relation to STUBS thereafter.
(c) Findings and Conclusions 1387 BHP-IT has sought to make far more of the scant evidence of the Commonwealth's "commercial behaviour" than it is capable of bearing. It has been submitted that the Commonwealth "sought to commercialise ADCNET" from an early date, as witness the BHP-IT communications with the Minister for Trade and Overseas Development concerning the possible Canadian tender; that it "consistently sought to demonstrate" the ADCNET system to outside interests so that it could further potential commercial opportunities (eg the CeBIT Hanover Fair and the Malaysian exhibition); that it was "commercialising" its network services in relation to infra-governmental users; and that it commercialised STUBS and Starlight technology. 1388 For my own part I am satisfied that the ADCNET project was designed to enhance the Commonwealth's Diplomatic Communications Network. Though I do not find the distinction sometimes drawn between "governmental" and "non-governmental" activities a particularly illuminating one, in this instance it is appropriate to describe the nature and purpose of the project as distinctively governmental in character. The project and its resultant product were driven by governmental imperatives. 1389 Of its nature, though, the project resulted in the development of a product and to which the Commonwealth had intellectual property rights may have been of potential interest to third parties. It is unsurprising that the Commonwealth might consider taking steps to utilise that intellectual property (or parts thereof) so as to obtain some return, or cost-offset, on its own investment in the project. The evidence of its so doing can only be said to illustrate action of a sporadic and distinctly desultory character amounting to little more than a few instances of approaches, demonstrations, etc over a five year period with some number of these, in fact, being instigated by BHP-IT for its own purposes. 1390 It equally is unsurprising that, as a service provider to other infra-governmental entities, DFAT should seek to enhance the "services" it provided and the "charges" it made to other governmental users when enhancing ADCNET. Later in these reasons I refer to the true character of "charges" made by one government agency to another when considering "rentals" paid by departments for the "lease" of government owned buildings: Part V: The Commonwealth's Cross-Claim: The Edmund Barton Building Expenses; see also Corrections Corporation of Australia Pty Ltd, above, at 450-451. Neither the imposition of such charges, nor the provision of services which might as well be available from the private sector, would amount to the carrying on of a business. It simply was not commercial activity for the Commonwealth to organise its own activities in ways designed to secure its cost effective and efficient use of its own resources: cf TP Act s 2C(1)(c)(i). 1391 If it had been the case that the Commonwealth, as a matter of "whole of government policy", had ordained that Commonwealth departments and agencies were to exploit commercially technological innovations resulting from activities undertaken by or for those departments and agencies, it might be that the aggregate of the actions taken by the departments and agencies could evidence the carrying on of a business of exploiting such innovation. The present is far removed from such a case. 1392 Insofar as the development of the ADCNET software was concerned, the evidence does not warrant a finding that this occurred as part of, or for the purpose of, a business being carried on by the Commonwealth. Whether or not the resultant product and its intellectual property could later be turned to account in some way, the software itself was developed for the Commonwealth's own use and purposes and not as well or at all for a business purpose. This conclusion would itself require the dismissal of the TP Act claim. The Commonwealth's conduct could only be impugned under s 52 of the TP Act if that conduct occurred in the course of, or as a part of, carrying on a business. This limitation has been said to arise from the wording of s 2A(1)as the Act applies only "in so far as" the Commonwealth carries on a business: NT Power Generation, above, at [87]. The ADCNET project was not part of a business. 1393 If there was a potential business being carried on at all in this case, it was the commercial exploitation of the product of the ADCNET project, but that business would not have encompassed the project itself. Having said this, I am equally not satisfied that such a business was carried on by the Commonwealth. Such steps as were taken to exploit the ADCNET product were, as I have said, sporadic and desultory. There is little to suggest actions were taken regularly, systematically, methodically to achieve a desired commercial end. The evidence suggests that, if some return were to be made on the ADCNET project, it would result from an adventitious occurrence and not from the concerted pursuit of business opportunities by the Commonwealth. 1394 I should add I do not regard the actions taken by the Commonwealth in relation to STUBS and Starlight as being of any relevance to the question whether, in the conduct of the ADCNET project, the Commonwealth was carrying on a business. That evidence did no more than illustrate the Commonwealth's intent to develop a private sector capability in information security technology - a capability the need for which was demonstrated in the ADCNET project itself - and the Commonwealth's entry into licensing agreements to that end. Whether or not its so doing had a business character because of activities engaged in by units within DoD (eg DSTO) is not a matter before me. 1395 I conclude that, as the misrepresentations made by the Commonwealth were not made in the course of carrying on a business, BHP-IT's claim under the TP Act must be dismissed.
(d) Other Matters 1396 I have already indicated that this and the contract claim have a marginal - but unexplored - significance in light of my rejection of GEC Marconi's claims against BHP-IT relating to the non-provision of STUBS and the non-payment of Milestone 4000. Despite this, I have dealt at some length with the contract claim. 1397 However, I do not intend here to go on to consider whether, if my conclusion on s 2A is incorrect, BHP-IT has made out (i) that Les Cook's formal response of 26 September 1995 was misleading or deceptive; and (ii) that BHP-IT relied upon, and in consequence was caused loss by, such misrepresentations as were made by the Commonwealth. The state of this claim does not warrant the giving of further attention to over 100 pages of submissions against the contingency of error in my s 2A finding.
PART V: THE COMMONWEALTH'S CROSS-CLAIM 1398 The Head Contract (as amended) required BHP-IT to achieve Milestone 5000 by 9 February 1997. That Milestone provided for the delivery on that date of the "Canberra System Developed Software". The Commonwealth's claim for damages is for losses incurred as a result of late delivery of this software. The software itself was that part of the ADCNET software which provided the "Message Switch" function. If used with a security gateway mechanism, this software would have enabled the IBM Classified Message Switch System ("the IBM System") to have been decommissioned. That System was not in fact decommissioned until 23 June 2000 when it was replaced by a new security gateway system, UNCLGUARD, which had been developed by DFAT and endorsed by DSD. 1399 The damages claimed are of two broad varieties. The first relates to the costs and expenses incurred by the continuing need to use and to maintain the IBM System until June 2000. The second was of various additional costs incurred by the Commonwealth up to July 2000 as a result of BHP-IT's delayed performance of the Head Contract. 1400 BHP-IT's first line of defence to this claim is that in December 1997 it entered into the Variation Agreement with the Commonwealth which had the effect, it is claimed, of extinguishing the Commonwealth's right to claim damages. Alternatively it is said that right was extinguished in respect of damages arising from breach of the Milestone 5000 requirement but suffered after the date of execution of the 1997 Variation Agreement. BHP-IT goes on to say that if the Variation Agreement had neither of the above effects, it was an implied term of the Variation Agreement that, upon BHP-IT's performance of the Amended Contract, it would be discharged from all obligations under the Head Contract. 1401 The second general defence relates to the IBM System claims. BHP-IT contends that none of the costs associated with its retention until 2000 were caused by its breach of the Head Contract. Rather they were the immediate consequence of the Commonwealth's decision in 1995 to cancel STUBS and to rely upon the IBM System pending the development of its own sealer and gateway mechanism. 1402 Distinctly BHP-IT has made specific challenges to each of the various heads of damage advanced by the Commonwealth. 1403 GEC Marconi has also put in detailed submissions challenging the Commonwealth's cross-claim. Its interest in the matter is that if the cross-claim is successful the resultant liability will be passed on to it by BHP-IT. 1404 Because of the significance the 1997 Variation Agreement has to the cross-claim in its entirety I intend to consider it before dealing with the substance of the Commonwealth's various claims.
(a) Background 1405 To recapitulate, after GEC Marconi terminated the Sub-Contract in December 1996, neither BHP-IT nor the Commonwealth sought to terminate the contract. Over the next year they engaged in negotiations which led to the December 1997 Variation Agreement. Though the formal legal relationship between the parties remained substantially the same, BHP-IT's role in the performance of its contract with the Commonwealth changed totally. It did not engage a sub-contractor to develop the R3 software. It performed the contract itself. 1406 During the negotiation period (ie in September 1997) GEC Marconi commenced these proceedings against BHP-IT. Shortly prior to the execution of the Variation Agreement, BHP-IT filed its cross-claims against (inter alia) the Commonwealth. 1407 In October 1997 the Commonwealth issued a Notice of Breach to BHP-IT. The breach notified was the failure to deliver the Developed Software as specified in the Schedule 8 Implementation Plan.
(b) The Terms of the Variation Agreement 1408 The Agreement professed on its face to have been made as a variation under cl 45 of the Head Contract. It described its purpose as being to amend that Contract "following the actions of [GEC Marconi] … to frustrate the performance of [the Head Contract]". And it amended both provisions in the Head Contract and the requirements of the Schedules to it. 1409 These amendments made plain the performance to be expected of BHP-IT. A new FRS (Version 4) had been prepared in late 1997 after agreement was reached in August/September 1997 on changes to the existing version after a comprehensive review of the FRS over several months. Schedule 1 of the Head Contract was amended accordingly. An entirely new Implementation Plan was prescribed in Schedule 8, that Plan being premised upon a new manner of performance of the Contract by BHP-IT. There were to be five milestones, the first of which, Milestone 1000 ("Project Mobilisation"), was to occur on 19 December 1997 this being the agreed date for "project resumption". The four subsequent milestones were quite different in character from the six they replaced. 1410 As has been seen, the Variation Agreement did not alter the agreed contract price. Nonetheless, the creation of new milestones in place of the old required that new arrangements be made for the Milestone payments. BHP-IT could retain what it had been paid for Milestone 1000 (which was earned on the date the Variation Agreement took effect). The two further milestones it had already received (Milestones 2000 and 3000), were, in effect, returned to the Commonwealth. BHP-IT was to be paid under the amended Contract as and when it met the new milestones. 1411 In describing the amendments made by the Variation Agreement to the Head Contract and its Schedules, cl 3.3 of the Variation agreement stated that these amendments were: "to facilitate the completion of the project and do not make use of any of the material provided by EASAMS following the actions of EASAMS, and do not result from or constitute a decision by BHPIT not to complete the works under the original contract in the manner contemplated under the original contract." Emphasis added. BHP-IT was, in other words, committing itself "to start again from scratch" without the benefit of any work undertaken by GEC Marconi. Equally, the amendments were not necessitated by a decision by BHP-IT not to perform the unamended Contract in the manner contemplated by it. 1412 Apart from effecting amendments to the Head Contract and its Schedules, the Variation Agreement contained substantive provisions of its own. They are the source of the present controversy. 1413 Though clauses 4, 5 and 6 are central to the controversy between the parties, there are several other clauses (cll 2, 7, 8 and 11) to which it is necessary to refer. The relevant clauses are as follows: "2. Effect This Amendment will take effect from 19 December 1997. … 4. Reservation of Rights 4.1 The Commonwealth and BHPIT both reserve any rights that they may have under the original contract in relation to any claim that EASAMS, BHPIT or the Commonwealth may bring against the other. In particular, the Commonwealth and BHPIT agree that except as specifically provided for in this Amendment they have not waived any claim against each other. 5. Release from Further Work The Commonwealth hereby release BHPIT from any further obligation to perform the work as required under the original contract. 6. Work still to be Performed The Parties agree that BHPIT will perform the work under the Agreement as amended. 7. Undertaking by The Broken Hill Proprietary Company Limited The Commonwealth agrees that it will not take any action in respect of the original contract against The Broken Hill Proprietary Company Limited (BHP). 8. Liquidated Damages The Commonwealth waives all rights to liquidated damages under the original contract. … 12. Excusable Delay BHPIT agrees to waive all claims against the Commonwealth under the original contract for delay costs except those that are found by a court or as a result of arbitration or mediation to which the Commonwealth is a party to have arisen from a claim by EASAMS on BHPIT and to have been the direct result of an action or omission of the Commonwealth." 1414 I would add that it was cl 3 that amended the terms and conditions of the Head Contract and the Schedules in the ways that were shown in versions of the Head Contract and the Schedules annexed to the Variation Agreement. 1415 In consequence of the response made by BHP-IT to supplementary questions asked of the parties it is necessary to refer to the liquidated damages provisions of the Head Contract. Clause 39 provided: "39. LIQUIDATED DAMAGES 39.1 Where, through the fault of the Contractor, the Acceptance Tests are not successfully completed by the relevant Contract Acceptance Date or extension thereof, then: (a) if it is specified at Schedule 3 that liquidated damages are payable and an amount has been specified in Schedule 8 against a Contract Acceptance Date as the amount (the "liquidated damages amount") that is to be payable by the Contractor as and by way of liquidated damages to the Customer for the loss suffered by the Customer as a result of the delay commencing on the expiration of the relevant Contract Acceptance Date, and the Customer notifies the Contractor that it intends to rely on the remedy set out in this paragraph - the Contractor shall pay that liquidated damages amount as set out in Schedule 8; or (b) if no amount has been specified in Schedule 8 against a Contract Acceptance Date as the liquidated damages amount or no notice has been sent by the Customer under paragraph (a) - the liability of the Contractor shall, in respect of the delay that occurs after the expiration of the Contract Acceptance Date, be determined in accordance with clause 38." 1416 Schedule 3 ordained that liquidated damages were payable in accordance with Schedule 8. And that Schedule provided, insofar as presently relevant, that: "2. LIQUIDATED DAMAGES 2.1 The Contractor shall pay liquidated damages to the Customer for delays incurred in delivery of the Deliverables in accordance with the Contract Acceptance Date as specified in Table 8.1 and the amounts specified in Table 8.2. The aggregated liquidated damages payable under this Contract and damages for any subsequent loss suffered by the Commonwealth for further delay in completing the Acceptance Tests which would be incurred before termination of the Contract by the Commonwealth shall be limited to 5% of the Contract Price. Deliverable Reference Ident Deliverable Description Liquidated Damages Amount 1000 Project Mobilisation Not applicable 2000 Preliminary Design Review Nil 3000 Critical Design Review Nil 4000 Test Readiness Review Nil 5000 Canberra system Developed Software $2,000 per day
(c) The Construction Dispute 1417 The difference between the parties can be simply put. When BHP-IT failed to deliver the Developed Software in accordance with Schedule 8 of the unamended Head Contract it breached several provisions of that contract (eg cl 9D, cl 10.1). The Commonwealth, having elected not to terminate the unamended Head Contract, BHP-IT's obligation to perform (albeit late) remained and the Commonwealth was entitled "to sue for any damage suffered … through the delay": Carr v J A Berriman Pty Ltd, above, at 349; see also Farnsworth, Contracts, 852 (3rd ed). That was the position at the time the Variation Agreement was entered into. 1418 The Commonwealth contends that that right remained unaffected by the Variation Agreement and was expressly preserved by cl 4.1 of that agreement. All that the Variation Agreement relevantly did was fix a new date for delivery of the Developed Software. 1419 BHP-IT's first contention is that, properly construed, cl 5 operated retrospectively to release it of its past obligation to perform. This included the release of such rights as the Commonwealth had to make claims in respect of those obligations. Alternatively it is said, if the reservation of rights in cl 4 had a subsisting operation, no damages could be claimed from the time of execution of the Variation Agreement as BHP-IT was not thereafter guilty of any delay in performing its obligation to deliver the Developed Software. It was performing the Head Contract as amended according to its terms. For convenience this second contention will be referred to as the "cap construction". 1420 GEC Marconi, likewise, advance the cap construction. But its principal submission is that such were the dimensions of the changes the Variation Agreement made to the Head Contract and the Schedules, that an intention was manifest to rescind that Contract and to bring into existence a new contract consisting of the Variation Agreement with its annexed amended versions of the Head Contract and the Schedules. 1421 The further submission raised by BHP-IT in response to supplementary questions was that the cl 8 waiver of "liquidated damages" was intended to refer to all Commonwealth contractual rights under cl 39.1 to damages associated with delay in performance of the Head Contract by the designated "Contract Acceptance Date". It is contended that it would make no commercial sense to waive damages under cl 39.1(a) (which limited recovery to 5 percent of the contract price - approximately $460,000) while retaining an unrestricted right to damages up to the limited in the cl 38 damages cap of $8.6 million): cf Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 837, 840-845. 1422 The Commonwealth's short answer to this submission is that cl 39.1 embodied distinct rights. Sub clause (a) gave a right to liquidated damages to be calculated at a designated daily rate up to a fixed maximum sum. Sub-clause (b) acknowledged the Commonwealth's independent right to claim unliquidated damages at common law but that right was subjected to the cl 38 "damages cap". Clear express words would have been required to rebut the presumption that the Commonwealth did not intend to abandon the latter right: Mancorp Pty Ltd v Baulderstone Pty Ltd (No 2) (1992) 60 SASR 120 at 126-127. The Variation Agreement was executed after this litigation had been initiated (including the cross-claim against the Commonwealth), and as the 5% liquidated damages ceiling was by that time unlikely to represent the true measure of loss to the Commonwealth, the waiver of the cl 39.1(a) right alone had a sensible explanation.
(d) Applicable Principles 1423 I have referred earlier in these reasons to the canons of construction to be applied in construing commercial contracts: see Part II: The Proper Construction and the Applicability of Sub-Clauses 40.8 and 40.9. I will not repeat what I there said, other than to note (i) that, where there are competing interpretations, an interpretation that best serves the commercial purpose of the contract is to be favoured: see Lewison, The Interpretation of Contracts, paras 1.06-1.07 (2nd ed); Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 at 299; Di Dio Nominees Pty Ltd v Brian Mark Real Estate Pty Ltd [1992] 2 VR 732 at 740-741; Concut Pty Ltd v Worrell (2000) 176 ALR 693 at [54], [56]; and (ii) that, as the whole of a written instrument is to be considered in the process of construction, there is a presumption against surplusage: Big River Timbers Pty Ltd v Stewart (1999) 9 BPR 16, 605 at 16,606. 1424 I have also made reference earlier to aspects of the law on contract variation: see Part II: The Emulation Variation Agreement. It is appropriate that I make the following additional observations here. The principles governing the effect a contract of variation may have on the contract it varies are settled, even if they do some violence to "strict logic": Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 at 135; Wilken and Villiers, Waiver, Variation and Estoppel, paras 2.26-2.36. The variation contract may effect (i) a complete discharge of the original contract and the substitution of a new contract in its stead; (ii) a partial discharge of the original contract with or without new terms for those discharged; or (iii) the addition of new terms without any partial discharge. The determining factor is the intention of the parties as disclosed in the variation agreement: Tallerman & Co Pty Ltd, above, at 145; Federal Commissioner of Taxation v Sara Lee Household & Body Care (Aust) Pty Ltd (2000) 172 ALR 346; Concut Pty Ltd v Worrell, above, at 698-699.
(e) Conclusions 1425 Before considering the principal controversy between the parties as to the effect of the Variation Agreement, I should refer to the discrete supplementary submission made by BHP-IT concerning the cl 8 waiver of rights to liquidated damages. I am in general agreement with the submission made by the Commonwealth. Clause 39.1 and the Schedules do maintain the liquidated damages/unliquidated damages distinction. I can see no justification in contriving the cl 8 reference to "rights to liquidated damages" as if it embodied the parties own dictionary meaning of the description - a meaning that encompassed "unliquidated damages". Moreover, I am of the view the Commonwealth's retention of its right to claim unliquidated damages can properly be said to reflect a reasonable commercial judgment at the time. This litigation had been initiated. As I will indicate below, if BHP-IT was found liable to the Commonwealth for delay occurring after the expiration of the Contract Acceptance Date, any such liability could be passed on in turn to GEC Marconi. The Variation Agreement itself acknowledged GEC Marconi as the party responsible for frustrating the performance of the original Head Contract. 1426 I turn now to the principal controversy. Notwithstanding the significant differences between the original Head Contract and the amended Head Contract (most particularly in relation to the manner of performance of each under their respective Implementation Plans) I am satisfied that the parties intended in the Variation Agreement to partially discharge the original Head Contract and to substitute new terms, and not to discharge it totally and to substitute a new contract for it. 1427 The textual indications of this intention in the Variation Agreement itself are clear enough as both the Commonwealth and BHP-IT have pointed out in their submissions. Its declared purpose was to amend; not to discharge. 1428 Much more problematic is the question of the extent of the variation of the parties' rights and obligations it intended to make. 1429 It probably was the case that cl 3 of the Variation Agreement (which varied the original Head Contract and Schedules) was itself sufficient to bring about a varied contractual relationship in which BHP-IT was no longer required to perform in accordance with the unamended Head Contract and Schedules but was now obliged to perform in accordance with the amended Contract and Schedules. These were the inexorable consequences of the parties agreeing to cl 3. 1430 But the Variation Agreement left nothing to doubt. The Commonwealth expressly released BHP-IT from any further obligation to perform as required under the unamended Head Contract: cl 5. And it was agreed that BHP-IT would perform as required by the amended Head Contract and Schedules: cl 6. Considered simply in light of cl 3, one could conclude readily enough that cl 5 and cl 6 did no more than emphasise unequivocally what was the effect of cl 3 in any event. But does the Variation Agreement construed as a whole require a different conclusion? In my view, it does not. 1431 The Agreement on its face had two principal purposes. One was the prospective one of providing for the future performance of the Head Contract - ie "to facilitate the completion of the project". As what was proposed cut across what had already been done (most notably in relation to Milestone payments already made), provision needed to be made to harmonise what had been done with the performance that was proposed. For this reason the Variation Agreement made express provision both to recover milestone payments 2000 and 3000 (which were inconsistent with the new milestones 2000 and 3000) and to relieve BHP-IT of obligations it had under the Financial Undertakings it had given in respect of those two milestone payments. 1432 The second and quite separate purpose of the Variation Agreement was the retrospective one of addressing the rights which had arisen under the original Variation Agreement in consequence both of its performance and of GEC Marconi's actions in "frustrat[ing] its performance". It is not surprising that it did this. Though it was entered into after almost a year of negotiations, the Variation Agreement was executed under the shadow of the litigation initiated by GEC Marconi. The Commonwealth had only recently served a Notice of Breach on BHP-IT. And BHP-IT had made its cross-claim against the Commonwealth. As BHP-IT rightly submits, the tone and tenor of the Variation Agreement portrays GEC Marconi as the party whose wrongful conduct created the need for the agreement, and BHP-IT as a party that had not sought to escape from the commitment it made under the original Head Contract. 1433 It is noteworthy, as a matter of emphasis that cl 4.1 of the Variation Agreement (the Reservation of Rights clause), in fact, preceded cl 5 and cl 6. Like those two clauses, it was probably strictly unnecessary: see Mancorp Pty Ltd v Baulderstone Pty Ltd (No 2), above, at 126-127. But it emphasised that existing rights were being preserved. Each party reserved any rights it might have under the contract in relation to any claim that GEC Marconi or the other party might bring. And no claim between "the Commonwealth and BHP-IT … [was] waived" except as specifically provided for in the Variation Agreement. Several such claims were specifically provided for (eg in cl 8 and cl 12). The Commonwealth's accrued right to sue BHP-IT for damages for delay in delivery of the Developed Software was not one of these. 1434 Given the litigation climate to which I have referred, I consider the failure to waive this claim as being intentional and, contrary to BHP-IT's submission, as not being contrary to business common sense. When the Variation Agreement was executed there had been an almost two year delay in the performance of the Head Contract. That occasioned loss to the Commonwealth and it was a consequence of what were perceived to be the wrongful actions of GEC Marconi. The Commonwealth's retention of its right permitted that loss ultimately to be passed on by BHP-IT to GEC Marconi if it was found to be the wrongdoer in the legal proceedings it had initiated. And as I will indicate below, the Variation Agreement necessarily limited the period of the delay claim to that which ran from the time of breach until the execution of the Variation Agreement. The loss from this delay could only be sheeted home to GEC Marconi if, first, it was sheeted home to BHP-IT. I merely note in passing that GEC Marconi has taken a live interest in this proceeding in challenging the actual damages sought by the Commonwealth. 1435 To conclude then, I consider that cl 4 on the one hand, and cl 5 and cl 6 on the other, addressed quite different subjects. The latter addressed BHP-IT's performance obligation for the future; the former, rights arising from what has already transpired. I see no reasonable basis for construing the clear words of cl 5 in the manner proposed by BHP-IT. They simply do not, and were not intended to, address the question of acquired rights. 1436 I am satisfied, then, that BHP-IT's primary submission must be rejected. 1437 I have already foreshadowed my conclusion on the "cap construction". The Variation Agreement can properly be characterised in BHP-IT's terms as requiring a "starting from scratch" performance of the amended Head Contract by BHP-IT. It did much more than extend the time at which BHP-IT was to deliver the Developed Software. It recognised that a new state of affairs existed and it created a new mode of performance in conformity with which BHP-IT was to develop and deliver the software. BHP-IT's performance was no longer to be in accordance with the terms of the unamended Head Contract. From the date of the Variation Agreement, that contract was no longer to be performed according to its terms and BHP-IT could not be held liable in damages for not so doing or for delay in so doing. 1438 BHP-IT's alternative submission is that, until it delivered the Developed Software under the amended Head Contract, it continued to incur liability for the loss suffered from its failure to perform the unamended Head Contract according to its terms. I do not agree. From the date the Variation Agreement took effect, it was not open to BHP-IT to perform the unamended contract. The parties had agreed otherwise. And by so doing they brought to an end the period in which BHP-IT's liability for delay in performance ran. BHP-IT was now engaged in a different performance albeit the ultimate deliverable - the Developed Software - was substantially the same as under the original contract. 1439 This conclusion is, in my view, in accord with the commercial purpose of the Variation Agreement. The Agreement marked the "resumption" of the ADCNET project (cf the amended Schedule 8, Milestone 1000) and the end of the period of delay in it. It is unlikely, in my view, that reasonable parties in the position of the Commonwealth and BHP-IT, having negotiated an agreement for the renewed performance of the ADCNET contract with changed milestones but an unchanged contract price, would nonetheless have intended that each and every minute of the performance of that contract could sound in damages for delay for BHP-IT's not having performed the original Head Contract according to its terms. If this was to be the case notwithstanding this particular Variation Agreement, it would have required an express term to that effect. 1440 I should add that I do not regard the cl 4 preservation of rights as requiring me to arrive at a different conclusion. The Commonwealth's right to sue BHP-IT for breach of the original contract was an accrued right which was preserved by cl 4. What the Variation Agreement did was not to destroy that right but, rather, to limit the damages that could be claimed in reliance on it. This it did by bringing to an end the period of delay in performance of the original head contract for which damages would accrue. It put it beyond BHP-IT's power to complete performance of the original Head Contract. BHP-IT was thereafter to enter upon the performance of the amended Head Contract. 1441 My conclusion, then, is that the alleged losses suffered on and from the date the Variation Agreement took effect are not recoverable by the Commonwealth. Those that began to be incurred prior to that date (eg in relation to continued project management) but which continued thereafter lost their compensable character on and from that date.
(1) Retention of the IBM Classified Message Switch System 1442 This claim is based on a counterfactual. At the time of the ADCNET contracts the IBM System provided both the message switch and the boundary security functions for the Department's communications network. The ADCNET R3 message switch software was to provide the former but not the latter of these functions. In consequence, even if it had been delivered on time before the IBM System could be decommissioned, a replacement boundary security mechanism would have had to have been obtained. 1443 The IBM System was decommissioned on 23 June 2000. The new message switch function was performed by what was known as the Expedited Release 3 software ("ER3"). This software, which was a subset of the ADCNET R3 software, was developed by BHP-IT pursuant to Change Request 7 ("CR007") which was agreed to on 5 September 1998. ER3 was delivered to DFAT on 31 August 1999. The new boundary security function in turn was performed by UNCLGUARD, a software gateway, which was developed by DFAT. Its use was endorsed by DSD on 15 May 2000 shortly prior to the decommissioning of the IBM system. 1444 DFAT's claim is that, if the Canberra System Developed Software had been delivered on 9 February 1996, it would have developed a security gateway mechanism that would have enabled the IBM System to be decommissioned prior to November 1996 when it was in fact moved to the RG Casey Building. 1445 The counterfactual with which I am concerned is whether, and if so when, prior to 23 June 2000 the Commonwealth would have developed or procured and then implemented an alternative boundary security mechanism to the IBM System. If it was after the execution of the December 1997 Variation Agreement, this claim must fail for the reasons I gave above. The assumption I am required to make in this is that the Commonwealth obtained the R3 software on 9 February 1996. 1446 To appreciate the basis of the submissions of BHP-IT and GEC Marconi it is necessary to refer at some little length to the actions taken by DFAT between 1996 and 2000 to implement an alternative mechanism. Before doing so there is one concept to which reference will be made which should be explained. It is the concept of "cutover of software". 1447 Les Cook explained it in the following passage of evidence when discussing the actual decommissioning of the IBM message switch. "The IBM message switch was connected via communication lines to a large number of other computing systems in all of the Department of Foreign Affairs & Trade's overseas posts and to quite a number of other government organisations in Australia. The main part of the cutover was progressively to reconnect each of those lines from the old message switch to the new one, which, in each case, entailed some changes to the system at the other end of the communication line - at the post or at the other government organisation. The task of preparing for, performing and then checking the results of those reconnections is time consuming and took - it in fact took some six months from the start of the process of using the new software to the point at which all of the external systems and all of the internal processing was now being done using the new message switch rather than the old one. In the interim both systems were performing their tasks connected to - each connected to a subset of the total external environment."
(a) Factual Setting 1448 Since at least August 1992, DFAT had planned to move from its then home in the Administration Building to the RG Casey Building in around mid-August 1996. The ADCNET contracts when executed in September 1994 provided for the delivery of the R3 software integrated with the STUBS devices within a timeframe that would allow the IBM System to be decommissioned prior to the move in 1996. 1449 Les Cook's 27 March 1995 "STUBS Alternative" paper that was prepared for the SPC suggested that to implement Option C would occasion a delay of "perhaps 3 months" although it went on to acknowledge the "possibility that delays will cause the IBM not to have been replaced before the move to the new building". 1450 The minutes of the SPC meeting of 25 May recorded that "[t]he time frame for building an alternative to STUBS into ADCNET has passed". 1451 In his change of tactics memoranda of 17 and 22 June Les Cook expressed the views that if Option C was "firmly" decided on at that time "it [was] possible, but not certain" that moving the IBM to York Park could be avoided. He expressed a like view in relation to the "deferral" option (ie deferring a decision until September/October 1995). 1452 By the time CR3049 was raised DFAT was envisaging that the R3 software be completed and tested using STUBS emulation. The cancellation of STUBS did not change that. What it did do was raise the need for "a strategy to replace these devices". It now envisaged that this would "be agreed by all parties including the Department's security authorities and DSD": Les Cook's 26 September 1995 letter. CR3052 was raised the same day. It related to the feasibility of the STUBS replacement strategy. 1453 By this time a further option, Option D, was being advanced by Les Cook and Mr Nichols. This was an enhanced version of Option C, the enhancement being "the encryption of unclassified documents … from ADCNET": Nichol's minute of 25 September 1995. 1454 The use of Option D had previously been raised by Les Cook with the ADCNET Security Sub-Committee on 22 September 1995. The minutes of that meeting record the following: "4. Mr Cook said they had commenced work on deciding how to build Option D. … We will work with the PSI to see how to change the contract. But until we work out how it will fit into ADCNET we cannot estimate the cost impact, at the moment Option D is the only alternative we have and the committee should endorse that as we will quickly locked into this option. Emphasis added. 5. Mr Allen said there was a disposition with the Executive to go with Option C. If Option D, using the KG84s, can better protect us from external attack then we should go with that option. We need DSD's assistance with this too. Mr Cook said he and Mr Rogers had been through this and he is full aware of the proposal, for which Mr Cook will provide documentation for DSD. Mr Allen asked if it would protect against software errors. Mr Cook said it was about E3 protection against hostile software and better than E3 against the hacker. All the normal paths of attack are certainly closed. Mr Allen suggested we go ahead with the development and testing as soon as possible." 1455 On 25 September 1995 Les Cook sent a minute to both the ADCNET Sub-Committee and DSD providing the advice of the IT Branch and the ADCNET Project Management Team on Option D. That minute noted (inter alia) that the "major vulnerability of option C was considered to be the possibility of attack via the gateway, judged to be the most probable form of attack". The advice given was (inter alia) that: "Option D is recommended as providing the required level of functionality and the highest level of security which is considered practical in the ADCNET environment, particularly with regard to prevention of external attack." 1456 On 21 November 1995 the ADCNET Security Sub-Committee again considered Option D. At that meeting Les Cook (who had no recollection of the meeting) is recorded as having said that he saw the use of Option D as a better means of boundary security for ADCNET than any other system that was currently available. 1457 The minuted record of discussion of Option D included the following: "Mr Allen asked if DSD had had a chance to look at Option D. Mr Rogers said DSD were happy with Option D as it was substantially stronger than previously proposed options. It doesn't answer all the questions, only a STUBS could do that, and so it would only reach an E2 level. However it's difficult to say when a better proposal will come along in the foreseeable future. Mr Skinner said that Option D would be in place for at least four years. Even if a new solution were to come to the fore, it would take that long to find the funds and retrofit throughout ADCNET. Mr Allen asked if there would be a problem getting DSD endorsement of Option D. Mr Rogers said they would suggest the level of residual risk and it was up to the department to accept that. At the moment, Option D looks like the best available." 1458 The committee agreed to endorse Option D on the basis proposed by Mr Skinner: ". We will proceed with Option D after advising Executive that the committee has endorsed the option. . Advise Executive that it is the best level of security currently available. . E3 is the best level of security we can deliver. Should better technology come along then the department should again consider its options. . We inform Executive that DSD, as part of the committee, has concurred with this decision." The "Executive" referred to is, I infer, the Senior Executive. 1459 On 7 December 1995 approval was given for scoping CR3057, the STUBS replacement change request using KIV-7 (Option D). 1460 By the end of December 1995 it was apparent that progress on using encryption for boundary security purposes had "not been as smooth as hoped or anticipated". KIV-7 by then was known (from work done by DFAT officers) to have several problems associated with its use and in particular with its reliability at higher speeds of operation. It is Les Cook's evidence that he was aware of these problems in September 1995 when he issued CR3052. In January of 1996 he was still confident that KIV-7 was a suitable substitute for STUBS and was "the best option we had". KIV-7 retained his "strong support" in 1996, 1997 and 1998. 1461 On 6 February 1996, following on discussions it had with Les Cook in late January, a company, Compucat Pty Ltd, sent proposals to DFAT for the joint development of a 'trusted' gateway for ADCNET. Les Cook's evidence is that these discussions were the product of an approach by Compucat and did not reflect his looking elsewhere because of concerns about KIV-7. 1462 9 February 1996 was the date on which the Canberra System Developed Software was required to be delivered under the Head Contract. 1463 DFAT's move to the RG Casey Building was completed in November 1996. The IBM System was one of the last items to be relocated. 1464 It is now necessary to turn to two separate developments, one relating to the development of ER3; the other, to the development of UNCLGUARD. 1465 First ER3. To anticipate matters, the purpose of the ER3 was to replace the IBM message switch (but not the use of the IBM system as a secured gateway). 1466 By August 1997 Mr Brent wrote in an Exit Brief he prepared - Mr Rentz was taking over as BHP-IT's project manager - that DFAT had a "sense of urgency about [the] issues" of building a new minimal message switch and of developing a secure messaging gateway. He described the background to these issues in that brief in the following way: "DFAT are incurring significant costs due to delays in the delivery of Release 3 under the contracted schedule DFAT were to de-commission the IBM message switch following formal acceptance of the ADCNET system. In the event DFAT are required to continue the operation of the IBM message switch until such time as ADCNET becomes available. In the absence of STUBS there is another reason for maintaining the IBM and that is that DSD have approved the use of the IBM as a secure gateway. … Thus DFAT are keen to replace the IBM but are not in a position to do so until a secure messaging gateway is available. Following the demise of STUBS, DFAT embarked on the development of a sealer and a messaging gateway based on military grade encryption devices. This project titled 'SMOG' has been in progress for about 18 months and a proof of concept prototype has been developed by DFAT with assistance from BHPIT (Richard Elliott). There are still some issues associated with SMOG, which need to be resolved and the project taken from a proof of concept prototype to a working production model. Therefore DFAT would like BHPIT to build: . the minimal message switch which represents about 63% of the total requirements for the Canberra switch; . the secure messaging gateway to enable the minimal switch to operate. The BHP-IT position is that: . BHP-IT is currently reviewing the DFAT definition of the minimal message switch; . BHP-IT is currently reviewing the concept of the secure messaging gateway - which, if accepted would represent an additional scope of work to be performed on a Time and Materials basis." 1467 Early in 1998 the person in DFAT responsible for the modification and maintenance of the IBM message switch suffered a serious illness. It would seem he was the only person who possessed a detailed knowledge of how to repair the message switch when it failed. His illness caused the Information Management Branch ("IMB") - the successor to the IT Branch - to develop a new "Contingency Approach". The final version of the recommendations of a working party established for this purpose reported to Kim Jones on 17 April 1998. It proposed the development of ER3 and made a recommendation that this be accepted by the IT Executive. On 14 May 1998 the Senior Executive approved the ER3 Contingency Plan and authorised negotiation for a change request. 1468 On 29 April 1998 Mr Rentz raised CR007 which related to the replacement message switch. After the approval given by the Senior Executive negotiations for the ER3 development were entered into and led to the signing of CR007 on 2 September 1998. 1469 BHP-IT commenced work on ER3 related tasks in anticipation of formal agreement. Work continued on ER3 until mid-1999. On 6 August 1999 DFAT was informed that all acceptance tests for the ER3 Developed Software had been completed. A certificate of acceptance for delivery of the software was issued by BHP-IT on 31 August 1999. 1470 Secondly, the secure message gateway: UNCLGUARD. After rejecting GEC Marconi's CR3078 $8 million proposal, DFAT advised BHP-IT and GEC Marconi on 20 May 1996 that it would deploy the ADCNET software using the IBM System to meet its security requirements. By letter of 30 May 1996 it informed BHP-IT that: "DFAT will bear the cost of developing additional equipment and/or software to increase boundary security so that the IBM can be removed from the configuration; this work will be performed outside the scope of contract ITB/002." 1471 Consistent with the proposal in CR3057, it continued thereafter until at least mid-1998 to investigate and evaluate versions of KIV-7. I need not detail the evidence of this other than to note that a version of KIV-7 ("SMOG"), was noted to be a possible future substitute for STUBS when the FRS changes were agreed in August/September 1997. 1472 The issue of the level of ITSEC assurance required for boundary security was a matter considered by the ADCNET Security Sub-Committee in 1997. Minutes of the Sub-Committee's 17 December 1997 meeting contain the following: "6. It was suggested that the next meeting should also consider the fact that "Boundary Security" is still required, and that a secure gateway is necessary. However, it was also noted that this is still probably several years away. 7. Noted also that if we move away from E3 then it is probably impossible to achieve a secure gateway, which another organisation needs to build. This work is currently in the hands of DSTO. Also noted that if we don't have a secure gateway there are only two alternatives: i. continue to keep the old IBM mainframe running, or ii. keep the unclassified material on NNS and the classified on ADCNET (which creates user problems with revisable documents)." 1473 After the Senior Executive had approved the ER3 Contingency Plan, Les Cook took BHP-IT's ER3 proposals to the ADCNET Steering Committee on 14 August 1998. The minutes record, amongst other things: "ER3, as specified by the BHPIT proposal, will not provide an assured security gateway to allow delivery of cables to non-Secret environments. For reasons relating to the Release 3 litigation, it will be delivered with the STUBS emulation of sealing and gateways. DFAT has not yet determined its strategy for implementing a fully assured gateway. DFAT and BHPIT will need to negotiate the addition of the selected gateway to ER3. Prior to this being completed, cutover to ER3 can commence with the retention of the IBM message switch in the role of security gateway. This will delay the reduction in operational costs resulting from decommissioning of the IBM but will still reduce the level of dependence on it compared to its present role." 1474 By 12 February 1999 internal DFAT documentation was recording that DFAT would decide "longer term gateway configuration soon". A DFAT minute of 29 July 1999 that was concerned with the tasks remaining to be performed to allow the decommissioning of the IBM System noted under the heading "Security Gateway" that: "The urgent need is for a decision on what to build/buy. Several options are on the table, including UNCLGUARD as proposed by Hugh Kellow and refined with Kannan and myself. The key action is to decide how much to involve DSD, given that they are likely to have (valid) reservations about each." 1475 DFAT minutes of 2 August (and later 30 August 1999) contain recommendations for the use of UNCLGUARD as the "most practical solution". The minute concluded: "That the proposed method of implementing a security gateway for the cables service be approved, subject to it being replaced at some time when a more secure and operationally acceptable solution becomes commercially available; That a competent independent company be contracted to perform a security audit of the gateway design and implementation, but not a formal evaluation to the ITSEC criteria; That DSD be asked to advise on the level of residual risk if the gateway is implemented and audited as proposed; That the residual risk be accepted provided that it is not greater than that currently accepted." 1476 A "Cut-Over Plan" of 5 August now included planning for the use of UNCLGUARD as the security gateway. 1477 A memorandum prepared by the Australian Government Solicitor in late August 1998 to accompany instructions to an expert who was to be engaged to quantify the Commonwealth's losses arising from the BHP-IT's failure to provide the Developed Software in February 1996, expressed the view that: "[i]f the Commonwealth wishes to recoup its expenditure for maintaining the Classified IBM System the implementation of the secure gateway should be completed within six months of the delivery of the rescheduled and accelerated ADCNET software. The establishment of an alternative (to the STUBS devices) gateway later than six months will throw into doubt the causal link between the keeping of the Classified IBM System operational and the failure of BHP Information Technology to deliver the ADCNET software under Contract ITB 002." 1478 I note the above as BHP-IT have relied on it in submissions as indicating why UNCLGUARD was adopted. 1479 There is no evidence before me as to how, and by whom, the decision to implement UNCLGUARD was taken. 1480 An independent consultant, Damian Farrell was engaged by DFAT to project manage the implementation of ER3 and the development of UNCLGUARD. In that role he produced a "Gantt Chart" entitled "ER3 Cut-over - Security Gateway - Decommission Classified Mainframe Project". That document identified activities undertaken in the development of UNCLGUARD and the periods of time when they were undertaken. The chart suggests that systematic development commenced in early August 1999 although a Table he prepared for his witness statement has several persons devoting 100 per cent of their time to UNCLGUARD from July 1999 - or in Les Cook's case, 20 per cent of his time. 1481 In cross-examination Mr Farrell indicated that the project he was managing had to finish before the end of the financial year. His "critical deadline" was 30 June 2000. "That was when the [IBM] mainframe lease was to run out". He accepted that this was the imperative behind completing the development of UNCLGUARD by that date. He was then asked whether DFAT would take shortcuts for the purpose of developing UNCLGUARD with accepted risks, and he replied: "It took shortcuts. We tried to come up with a system that could in fact be developed within the time. That's true. Some of the other proposals looked at could not be completed within time. One of the big issues was to make sure we had DSD approve the system because they also had to test it. They were also the ones who had to give us accreditation." 1482 As the 2 August 1999 UNCLGUARD recommendations indicated it was not intended that the gateway be evaluated in accordance with ITSEC criteria. The "independent company evaluation" that was envisaged was provided by Admiral Management Services ("Admiral") in early May 2000. Admiral believed that UNCLGUARD should meet the security requirements documented in its specification, provided that DoD gave a favourable report on a particular matter and DFAT was willing to accept a stated risk. 1483 On 15 May 2000 DSD provided its assessment of the security architecture and design. It commented: "a. Our policy is to recommend that gateways between SECRET level networks and IN-CONFIDENCE networks connected to the Internet should be AISEP evaluated to ITSEC E5 assurance. However, it is accepted this is not practicable within the implementation timeframe: emphasis added. b. Given the practical constraint that the gateway is based on COTS products with no formal level of assurance, then DSD considers the overall security architecture to be acceptable. This opinion is in agreement with the Admiral assessment (reference A)." 1484 UNCLGUARD was accredited by DFAT as its security gateway. 1485 Before turning to several matters raised in oral evidence and witness statements, I would note: (i) from September to December 2000 the ER3 software was modified so as to operate with UNCLGUARD the original software having been developed with STUBS in mind; (ii) the "cut-over" of the ER3 software commenced in January 2000 and finished in March 2000; (iii) UNCLGUARD commenced operation in parallel with the IBM System at the beginning of June 2000; and (iv) The IBM System was decommissioned on 23 June 2000. 1486 Les Cook's evidence in chief was that, with adequate resources, the UNCLGUARD gateway could have been developed and approved within six months allowing the cutover of functions from the IBM classified to be finished before completion of the move to the RG Casey Building. 1487 As to the time of actual development of UNCLGUARD, Les Cook expressed the view that the development of the security gateway could have started at any time a decision was taken but that it would have been preferable to perform the security gateway either after the ADCNET software was delivered or at least at a later point in the development of that software. 1488 On the same subject, John Crighton (who was head of the IBM Branch from May 1999), gave the following evidence: "When I took up the position of AS IMB there was active discussion amongst my staff, and with security advisers within the department and the Department of Defence, of alternative approaches to implementing a secure gateway that would work in conjunction with the new message switch software. The decision on which approach to take in relation to the secure gateway was not made until the new message switch software had been developed and is delivery reasonably assured. In or around July 1999 I decided that the Department should proceed on the basis of a security gateway developed "in-house"." 1489 Finally, Mr Farrell gave evidence that detailed design of UNCLGUARD could not be undertaken until ER3 was completed but conceptual design could have been undertaken prior to then.
(b) Findings and Conclusions 1490 The Commonwealth's primary submission is that in the nine months between when BHP-IT should have delivered the Canberra System Developed Software and when DFAT had to move the IBM Classified System in November 1996, Les Cook's Option C could have been developed, approved and made operational. This was achievable. In 1999, when the development of UNCLGUARD commenced, there was no pressing urgency to have completed the task by a certain date. Such a need did, however, exist in 1996 and, in the Commonwealth's submission, had DFAT been required to develop a security gateway mechanism at that time, it would have devoted more resources to ensure the task was completed by the time the DFAT had to vacate the Administrative Building. 1491 For its part BHP-IT contends that any damage the subject of the Commonwealth claims associated with the continued use of the IBM, including of its relocation from the Administration Building to the RG Casey building (also referred to as "York Park") in late 1996, and its subsequent use as the interim security gateway for the ADCNET software, was incurred as a direct result of the Commonwealth's conduct in: (i) cancelling the procurement of STUBS for the ADCNET project; (ii) failing to procure or provide an alternative security, or gateway, device within the timeframe of the Head Contract; (iii) implementing its deliberate strategy to rely upon the IBM in the absence of a security gateway device (be it STUBS or some other device in lieu of STUBS). Those losses, it is said, continued up until the time the IBM was decommissioned by the Commonwealth on 23 June 2000. BHP-IT submits the evidence shows that, even if BHP-IT had delivered the Release 3 software in February 1996, the Commonwealth would not have implemented an alternative security gateway any earlier than the time it actually did. 1492 GEC Marconi's submissions reflect those of BHP-IT. The claim that DFAT could have decommissioned the IBM System by November 1996 is challenged, though, on a separate ground. It is contended that the delivery date was not in fact 9 February, but that DFAT was obliged to grant a further eleven weeks extension for delay. This delay is the subject of the delay claim made by GEC Marconi against BHP-IT which has been considered earlier in these reasons: see Part II: The Delay and Prolongation Claim. My findings in relation to that claim are fatal to this separate submission of GEC Marconi. 1493 In my view, there are two critical dates that bear on the Commonwealth's claim. The first is the end of November 1996 when the IBM System was relocated. The second is the date of execution of the December 1997 Variation Agreement. 1494 The significance of the first of these two dates is that if DFAT could not have selected, developed and implemented an alternative security gateway by then, then it was inevitable that the IBM System be relocated to the RG Casey Building to perform the boundary security function for the ADCNET system. Such a relocation would, in my view, be likely to have affected significantly DFAT's decision-making in relation to the selection of an alternative to STUBS. 1495 The significance of the date of the Variation Agreement flows from my earlier holding. From that date such losses as flowed from the non-delivery of the Canberra System Developed Software were not compensable in any event. For this reason it is important to determine whether, on the counterfactual assumption upon which this claim is based, DFAT would have developed and implemented a security gateway before or after that date (assuming it would not have done so by the end of November 1996). 1496 Before indicating my own conclusions I should make this comment upon the nature of the hypothetical "factual" inquiry raised by this claim. I am required to make the counterfactual assumption that BHP-IT delivered the relevant software on 9 February while disregarding the improbability of earlier events having occurred as and when they did. I would merely instance that if BHP-IT had been ready to deliver the software on that date, the story of the cancellation of STUBS and of its timing could well have been very different. Be this as it may. 1497 As to the first of my critical dates - November 1996 - I am satisfied that there would have been simply no prospect of an alternative security gateway having been implemented by that date. I accept that DFAT had long cherished the ambition of decommissioning the IBM System before the move to the RG Casey Building and it had set its contractual delivery dates with this in mind. What would have prevented it achieving its ambition was the timing of its cancellation of STUBS and the course it then committed itself to in developing an alternative to STUBS. 1498 At the time of the STUBS cancellation it was not simply a matter of adopting Option C. Before the formal notice of cancellation was given on 26 September 1995, Option D was being proposed both to the ADCNET Security Sub-Committee and to DSD. DSD, it will be recalled, only endorsed Option C as an interim measure in its minute of 9 June 1995. A clear reason assigned for the change to Option D was that it provided a better means of boundary security for ADCNET than any other system that was then available. Option D was designed to retain the flexibility of Option C while strengthening against the threat of attack considered the most probable and which was the "major vulnerability of option C". 1499 I now refer to what I regard as a characteristic of decision-making in DFAT revealed in this proceeding. At its best it could be described as measured; at its worst dilatory. Four weeks after it was first canvassed with it, the Option D proposal was accepted by the ADCNET Security Sub-Committee on 21 November 1995. The Senior Executive was to be notified of this. Discussion of that acceptance noted that DSD was of the view that Option D was "substantially stronger than previously proposed options". And Mr Skinner stated that it would be in place "for at least four years". And so CR3057 was raised. 1500 In its submissions the Commonwealth describes Option D as being simply Option C with encryption. It goes on to ask me to infer that, if the Developed Software had been delivered in February 1995, DFAT's Senior Executive would there and then have dropped the use of encryption and would have chosen Option C without hesitation. The pursuit of Option D would not have been allowed to interfere with the imperative of developing a security gateway to enable the IBM System to be decommissioned before the move to the RG Casey Building. 1501 I do not accept this. Without pausing to consider how, in the hypothetical world of present interest, DFAT would have dealt with BHP-IT over CR3057 and the offered participation in the development of a STUBS replacement, I would say that the Commonwealth's submission assumes too much. 1502 I preface the following with the observation that no officer of DFAT at the time was asked to proffer a view on how, in that person's opinion, DFAT might have acted including in relation to resource allocation if the Developed Software had been delivered. It was left to Les Cook, a consultant, to venture views on this matter. I agree with the criticism made by GEC Marconi of Les Cook's evidence in this regard. 1503 DFAT had sound reasons for committing itself to Option D. I do not accept that those reasons would have been considered to have been of such marginal importance as would have justified the abandonment of Option D in favour of Option C for some temporal advantage and cost saving relating to the timing of the IBM System's decommissioning. The weakness exposed in Option C was represented in a way that would have made going back on the Option D decision, without more, difficult to defend - especially in light of DSD's earlier recommendation that Option C be regarded as an interim measure and the nature of its support for Option D. 1504 My impression of the senior decision makers in DFAT, typified by Kim Jones, is that they were cautious and, on occasion, somewhat risk averse. I imply no criticism in this. They had a responsibility that Les Cook did not. If it had crossed anyone's mind at the time to reconsider the Option D decision, I do not consider that the ADCNET Security Sub-Committee or the Senior Executive would have hastened to a decision to abandon Option D. I agree with GEC Marconi's submission that Option C (or UNCLGUARD) was not something that DFAT would have had in its mind in February 1996 if the ADCNET system had been delivered. Even assuming to the contrary, I consider that considerable deliberation would have occurred and consultation would have been had with DSD, before any decision to abandon Option D without further investigation was taken in favour of Option C. The hierarchical pattern of recommendation and decision would have been followed. Option C had its sceptics even before the advent of Option D. 1505 I am satisfied that, having committed itself with DSD blessing to the investigation of Option D, DFAT would have persevered in that course notwithstanding what would have been its obvious implication for the decommissioning of the IBM System. 1506 Distinctly, I accept, as the Commonwealth has submitted, that not all of the various steps that were required to be taken to implement a security gateway and to decommission the IBM System, needed to be taken sequentially. Some (but only some) could be done in tandem (eg the development of the gateway and the cutover of the message switch software). This said, I do not consider that the development of a security gateway (even of an UNCLGUARD variety) would have been attempted in the time then available. I do not consider that, viewing the matter prospectively, DFAT would have run the risk that it would be able to meet a November decommissioning deadline even if it took "short-cuts". Even if it be accepted that UNCLGUARD could in fact have been developed in about nine months (which I do not), I am not satisfied that the course taken in its actual development would have been replicated in the development of a security gateway in 1996. By 1999 DFAT had considered, and had sought DSD advice on, a considerable number of options for gateways. Though I am unable to make a positive finding as to how the decision to proceed with UNCLGUARD was made - I do not accept it was as a result of Mr Creighton's fiat - it was made (a) against a background of far greater familiarity with what was available; (b) in a setting in which DFAT's IT security policy had been extensively examined in early 1998; and (c) after a long period of involvement of DSD in its consideration of the various approaches to the security gateway implementation. This may help explain both why an Option C type gateway could have been adopted in 1999 and why an ITSEC evaluation was dispensed with then. A similar confidence in pursuing an UNCLGUARD type option in the manner in which it did in 1999-2000 could not have been expected in 1996. 1507 I would add that, contrary to DFAT's submission, I consider that there was a far greater perceived urgency to build the gateway and decommission the IBM System in 1999-2000 than there would have been in 1996. Three converging forces contrived that urgency. They were the ill health of the person who maintained the IBM message switch; the views expressed by the Australian Government Solicitor on the Commonwealth's damages claim in the GEC Marconi litigation; and, most importantly, the "critical deadline" set by the expiry of the lease of the IBM mainframe in June 2000. 1508 I thus far reject the Commonwealth's submissions. 1509 The next critical date in the Commonwealth's claim is the date of execution of the Variation Agreement in December 1997. Given the manner in which the parties have framed their submissions - essentially extreme positions have been taken up - it is more problematic to make a confident finding as to when, if at all, before June 2000, the IBM System would have been decommissioned (on the assumption being made). 1510 As I will indicate I do not accept the position taken by both BHP-IT and GEC Marconi that UNCLGUARD would not have been developed earlier than it was. However, I consider that the prospects were negligible of that development occurring prior to December 1997. 1511 It must be borne in mind that the twin assumptions on which I am now proceeding are that (i) the IBM System had been relocated to the RG Casey Building but (ii) it was only being used to supply boundary security, the message switch function being performed by the ADCNET software. 1512 The decision having been taken to pursue Option D in November 1995, I am satisfied that DFAT would have persisted in that course in much the manner that it did, while at the same time remaining open to new possibilities as in fact it was. Les Cook continued to participate in the investigation of encryption and versions of KIV-7 as also other possible gateways up until mid-1999. A letter from DSD to him of 21 July 1999 illustrated that search as it did DSD's appreciation by then of the urgent need to replace the IBM message switch. 1513 Having said this, I consider it quite likely that a decision on a gateway would have been likely to have been taken at a date earlier than in mid-1999. My reason for this view is that, in the events which in fact happened, DFAT needed both a gateway (its responsibility) and a message switch (BHP-IT's) before it could decommission the IBM System. The lack of the latter provided DFAT with time in which the options for the former could be explored. In saying this I am not expressing a view on the question whether a gateway could have been selected and developed in advance of, or in tandem with, the development of the ER3 software. All I am indicating is that DFAT was not the master of its own destiny because of its dependence on BHP-IT. 1514 If DFAT had its ADCNET message switch from February 1996, I am satisfied that it would have been likely to have acted with greater expedition than it in fact did. However, I am not satisfied that this would have resulted in the decommissioning of the IBM system prior to Variation Agreement notwithstanding that in 1997 DFAT would not have been diverted (as it in fact was) by contract negotiations with BHP-IT. 1515 There is nothing in the evidence before me to suggest that the IBM System did not operate to DFAT's satisfaction as a boundary security mechanism. Nonetheless I am satisfied that DFAT considered that its decommissioning was a matter of some urgency (as Mr Brent's August 1997 Exit Brief recognised) - an urgency that became the more pressing with the illness of the person who maintained the IBM System and the approach of June 2000 when the lease of the IBM mainframe ran out. 1516 I do not consider, though, that that sense of urgency would, in 1996 and 1997, have compromised DFAT's investigation of STUBS replacement options in cooperation with DSD. The evidence of Mr Cook's activities up until mid-1999 in this regard does not suggest that a decision would have been made on an alternative in 1996-1997. Option D was, as seen from the vantage point of DSD in September 1995, the best available solution and it was then "difficult to say when a better proposal will come along". DFAT had every reason to persist with Option D variants as Les Cook in fact did for three and a half years. I am satisfied that even if it had the ADCNET message switch it would have done so. 1517 The evidence does not suggest that an Option D variant could have been adopted in 1996-1997. The only question is when, if at all, pressure would have been put on the IT Branch to abandon Option D in favour of a new solution. If that occurred at all, it would in my view, have been in early 1998 at the time of the illness of the person who maintained the IBM. That event was a clear spur to action in DFAT. It led to ER3. I consider it probable that it would have led sooner rather than later to a new security gateway - the more so as the limitations of the available options were becoming more apparent by that time. 1518 It is unnecessary, because of my view of the effect of the Variation Agreement, for me to reach a concluded view on when I consider an alternate gateway would have been likely to have been selected and then implemented after December 1997. This said, I consider it more probable than not that resort would have been had to an Option C strategy in 1998. The same forces that led DFAT to adopt ER3 as a contingency plan, would have led to consideration of a replacement of the IBM System as a matter of urgency. The product of that, I venture, would have been the implementation of an UNCLGUARD type gateway sometime in early 1999. 1519 Because I am satisfied that no STUBS replacement would have been in place prior to the Variation Agreement, I find that such loss as was suffered by the Commonwealth in having to retain the IBM System in operation after 9 February 1996 and until December 1997 was attributable, not to BHP-IT's failure to deliver the Canberra System Developed Software, but to its own failure to develop an alternative to STUBS. The Variation Agreement relieved BHP-IT of any liability it might have incurred thereafter. 1520 Accordingly I reject this head of claim.
(2) Project Management Costs 1521 The cross-claim describes this head of damages as being the additional costs for the further engagement of the Project Manager, Les Cook, beyond the delivery date of the Head Contract of 29 May 1996, to the projected delivery date of 19 December 2000. 1522 Evidence was adduced at the hearing in support of this claim. It is fair to say that it was quite problematic for, while it showed that Les Cook was engaged and paid as a consultant by DFAT over that period, it is clear that some, and probably a considerable, portion of his activities in that period were quite unrelated to any possible loss flowing from the breach. Les Cook was, for example, engaged (inter alia) in the investigation of boundary security options over this period and Mr Farrell in his evidence, for example, attributed 20 per cent of the cost of Les Cook to DFAT from July 1999 to March 2000 to his work on UNCLGUARD. 1523 Needless to say the submissions both of BHP-IT and of GEC Marconi have focussed on what Les Cook was doing in the relevant period. It is claimed that the evidence shows (a) that he was providing services to DFAT in matters unconnected with project management of the Head Contract; and (b) that to the extent that his services had some connection to project management of the Head Contract and the development of software, these were services it was always contemplated he would provide. They were not additional services consequent on the late delivery of ADCNET Release 3 software. I have been invited to dismiss this claim in its entirety. 1524 In its Reply Submissions the Commonwealth appears to have abandoned the head of damage that it pleaded and which it addressed both in evidence and in its written submissions. It now says that the claim that the Commonwealth should have made for Les Cook's time should have been for the period 14 September 1994 to 19 December 1997 (the date of the Variation Agreement). The expenses relating to Les Cook for project management services that DFAT paid were wasted in this period as the contract had to be re-performed. The Commonwealth had erroneously claimed the period from 29 May 1996, when the ADCNET software ought to have been delivered to 31 August 1999 when the Expedited Release 3 software was in fact delivered. In the event $375,733 is now claimed as wasted expenditure for the period 29 May 1996 to 19 December 1997. 1525 BHP-IT contends that it would be quite unfair for the Commonwealth to attempt fundamentally to change the claim in the manner proposed. I agree. The change is not one of form and a quite different cross-examination could well have been undertaken given the way the claim is now sought to be put. 1526 I will consider this claim on the basis on which it was put. Before referring to the evidence (such as it is) that bears on this claim, I should note that my earlier conclusion on the effect of the Variation Agreement entails the consequence that this head of claim ceased to run on and from the date of that agreement. Thereafter, such project management costs as were incurred were incurred in the performance of the amended Head Contract and were referable thereto. While that contract did not expressly provide for the appointment of a project manager by the Commonwealth, the parties at the time clearly contemplated that such a function would be performed by a person acting for the Commonwealth.
(a) Additional Factual Material 1527 The evidence on this matter is relatively sparse. (1) On 2 February 1990 the company, L G Cook and Associates Pty Ltd, entered into a consultancy agreement with the Commonwealth to provide designated services to DFAT in relation to Stage I of the ADCNET project. Les Cook was to be the actual service provider. This consultancy was extended regularly with changes being made to the services to be supplied reflecting the evolution of the ADCNET project itself. (2) In February 1993 the responsibilities assumed included that of "the role of ADCNET Project Manager": letter to Mr Skinner of 1 February 1993. That role carried with it responsibilities that travelled well beyond management of the ADCNET contract at the time. In a letter of 16 February 1993 to Mr Cook, Mr Skinner described the position in the following terms: "The duties of the ADCNET Project Manager are as directed by the Department's Systems Policy Committee (SPC) and its subcommittee, the ADCNET Steering Committee. … In brief the duties can be summarised as managing the development of ADCNET Information Technology (IT) initiatives, both Stage 1 and Stage 2. Together with the Deputy Secretary, the FAS CSD and the AS ITB, you will be expected to regularly contribute to formulation of both strategic and tactical IT policy initiatives for the whole Department. You will be expected to form a close working relationship with the AS ITB who will continue to manage your contract and provide administrative, line management and delegation support": emphasis added. (3) A proposal was prepared by Mr Nichols in September 1994 for Mr Skinner's approval (later provided) that would continue Mr Cook's services until the finalisation of the ADCNET project which was then scheduled to be May 1996. That proposal again described Mr Cook as "ADCNET Project Manager". The tasks it envisaged included: "3 (i) provide technical advice on related projects (eg the move to the new building), design of Release 1.3.20, Release 3 implementation/upgrade strategies, cutover of the secure IBM to ADCNET. (j) provide advice to the Department on computer security, connectivity between ADCNET and NNS system and the connection of OGOs to ADCNET. 4. Mr Cook would be a member of the Release 3 Project Management Committee and would continue to be a member of the ADCNET Steering Committee, ADCNET Security Committee, Systems Policy Committee and IT Executive." (4) Later communications extended the time and the hourly rate of the consultancy. (5) It was Mr Cook's practice to lodge a standard form invoice fortnightly for services performed which listed dates and hours of work but which did not provide any indication of the work done for which payment was sought. (6) During the period May 1996-December 1997 Mr Cook provided a range of services to DFAT which were unrelated to the performance of the ADCNET contract. The fact of such services is evidenced (somewhat oracularly) in electronic diary entries and is reflected in the following passage of his cross-examination: "MR YOUNG: Q. Mr Cook, let me just put the substance of it to you. What I put to you is you wrote a detailed 19-page document addressing security gateway design principles dated 9 January 1997; do you recall that? A. I'm afraid I don't. Q. Do you recall this, that on 31 January 1997 you wrote a detailed paper dealing with convergence issues in the security area to Mr Woodhouse and copied to Mr Bagley, Higgins and others? A. I do remember some work on what was called convergence of technologies, yes. Q. Convergence of technologies was part of your wider security advisory role, wasn't it? A. No. Convergence of technology is related to trying to make the Department's secret level and non-secure networks similar in terms of their technology. And my involvement was providing advice on what the secure network did. Q. And, I suggest to you, commented on convergence issues, right, Mr Cook? A. Issues relating to convergence, yes. Q. You attended a meeting with SMS consultants dealing with convergence issues? A. Yes. Q. In July 1997, didn't you? A. I don't remember the date. Q. Mr Cook, in July of 1997 you wrote on 16 July another memorandum to Mr Nichols dealing with convergence issues; do you recall that? A. I don't recall the document, I'm afraid, no. I'm not saying I doubt it. Q. In August of 1997 you wrote a detailed minute to the steering committee copying Mr Jones dealing with convergence issues; do you recall that? A. I don't recall details of any of these documents, Mr Young, but I do recall I had involvement in the convergence examination, yes. Q. Right through July, August, September, October, November 1997, Mr Cook, didn't you? A. Again, I can't - I don't remember the dates. Q. Mr Cook, on 17 October 1997 you wrote a document about convergence strategy; do you recall that? A. No, I don't. Q. In November of 1997, Mr Cook, do you recall you wrote a paper dealing with email and the applicability of COTS packages and DFAT level of security? A. I'm afraid I don't remember any of the details of these documents, not without seeing them. Q. What about generally, Mr Cook? You were working heavily on convergence strategies and issues between July and November 1997, were you not? A. I was being consulted by the people who were. Q. And you were writing reports about those matters to your superiors in the Department? A. On subjects that I was asked to comment on, yes. Q. Mr Cook, do you recall on 8 August 1997 you made a visit to South Australia? Do you recall that? A. I'm afraid I don't. Who was it to? Q. You made a visit to South Australia … to see DSTO and Vision Abell -- A. Oh, yes. Q. -- seeking information in relation to the STARLIGHT product; do you recall that? A. I recall that. Q. You wrote a report about it? A. I did. Q. You wrote a report to Mr Nichols, Ms Bagley and others? A. I did write a report." It is also apparent through the above period that he was engaged in pursuing a suitable replacement for STUBS (a matter outside the scope of the Head Contract) and in attending meetings of the IT Executive, etc. (7) By the time of the "change of tactics" proposal in mid June 1995, Les Cook was proposing that new (or new versions of) hardware and software packages might be added to the ADCNET system. The 1997 revisions of the FRS and discussions with BHP-IT (referred to earlier in these reasons) evidenced Mr Cook's concern at the time with obsolescence and his desire to avail further of available COTS products. His concern with obsolescence was further manifest in a minute to Mr Skinner of 28 August 1996 which, in giving a prognosis of the ADCNET contract, stated: "even if it is completed within, say, two years the delivered software will be based on standard software and equipment which is then obsolete, requiring effort to upgrade before it can be used." (8) Mr Skinner made the following observation in his witness statement concerning the continuing use of Les Cook's services: "It was my opinion in 1996 that the continued involvement of Mr Cook as the ADCNET Project Manager representing the Department of Foreign Affairs and Trade was essential to the Department's interests. Mr Cook provided the Department with the technical, security and corporate expertise necessary for the viability of the project that was not otherwise available." (9) The total amount paid to L G Cook & Associates for the period 29 May 1996-19 December 1997 was $375,733.
(b) Submissions and Conclusions 1528 As pleaded and as originally put this head of damage was in the nature of a delay claim pending the performance of the original Head Contract: cf Farnsworth, Contracts, 582 (3rd ed). It was for the additional costs of engaging Les Cook beyond the 29 May 1996 delivery date under the Head Contract. To the extent that the presupposition of this claim is that, but for BHP-IT's breach, the Commonwealth would not have continued to engage the services of Les Cook after the delivery date, the claim is manifestly untenable. It fails to differentiate between the ADCNET project for which Les Cook was the manager, and the ADCNET contract which represented a part of his project management responsibility. 1529 In its submissions GEC Marconi notes that the Commonwealth has not led any evidence indicating that Les Cook would not have been required to provide services to DFAT beyond 26 May 1996 had the Release 3 software been developed. The submission went on to point out - correctly - that logically Les Cook was required by DFAT for as long as boundary security for ADCNET required implementation. 1530 My own view is that irrespective of the breach DFAT would have retained Les Cook's services for the period 26 May 1996 - 19 December 1997 at least. I set out above Mr Skinner's evidence on why he considered Mr Cook's continued involvement as ADCNET Project Manager from 1996 onwards as necessary. Those same considerations of "the Department's interests", "the viability of the project" and Les Cook's "technical, security and corporate expertise" would have told heavily in favour of retaining his services after May 1996. There was to be the move to R G Casey; there was the emerging problem of obsolescence and the need to update COTS packages; and, most importantly, a boundary security device was needed before the IBM system could be decommissioned. These were all ADCNET project, but not ADCNET contract, matters that required attention at the time. 1531 I need not repeat here my earlier findings in relation to when a replacement for STUBS would have been likely to have been developed had the software been delivered on time. It would, in my view, have post-dated the Variation Agreement. I am satisfied that there would have been more than sufficient life remaining in the ADCNET project during the period of present concern to have made it likely that Les Cook's services would have been retained for that time at least. In consequence the global claim made for his services for that period must be rejected. 1532 It is clear, though, that some proportion of Les Cook's time in the relevant period was related to the, then, still unperformed Head Contract. It is equally clear that a proportion of his time was unrelated to contract matters, even if it related to the ADCNET project as such. And beyond this, Mr Cook provided services that were not ADCNET related at all. 1533 The Commonwealth has not led evidence positively to identify, as best it could, the respective proportions of time spent on contract-related and non-contract related work (ie ADCNET and otherwise) work. It has been acknowledged that some part of Les Cook's time could not be attributed to BHP-IT's breach. Initially the Commonwealth proffered a 20 per cent reduction of its claim to account for this. This was later reduced to 10 per cent, a figure that is described as "more than adequate and reasonable, if not generous". 1534 BHP-IT has submitted that the 10 per cent figure is out of all proportion to the amount of non-contract related work done. It goes on to contend that, given the Commonwealth's failure, or inability, to lead evidence as to Mr Cook's involvement in contract-related matters and given the considerable non-contract work done, the claim should be dismissed in its entirety. 1535 For my own part, while I consider that the Commonwealth is entitled to be compensated for having to incur expenditure by way of contract management in consequence of non-delivery of the Developed Software, the level of compensation awarded should be far less advantageous to the Commonwealth than it suggests. 1536 Les Cook's own evidence on how he spent his time was quite unhelpful and in some degree disingenuous. His invoices are unrevealing and his electronic diary entries are largely unexplained. 1537 There is no adequate evidentiary basis before me to provide a remotely accurate quantification of the actual time he spent in providing services to DFAT at the time that were unrelated at all to ADCNET. I am satisfied that he provided such services and that they were not insignificant in character and in time demands. In the relevant period they are exemplified by his work on convergence issues. I am also satisfied that he performed significant ADCNET project related services that were not also ADCNET contract-related. GEC Marconi have rightly pointed to STUBS replacement activities, although I accept that concentration on a STUBS replacement probably became more intense in 1998 after the need to decommission the IBM system became the more pressing. I consider services in this category to have been likely to have been of greater volume than those unrelated at all to ADCNET in the period of present concern. 1538 The evidence does indicate some level of continuing activity on Les Cook's part in relation to the ADCNET contracts prior to GEC Marconi's termination in December and, after the decision by the Commonwealth not to terminate, a process both of ongoing dealing with BHP-IT over (a) the FRS and COTS products and (b) contract negotiations for the Variation Agreement. Distinctly, there were internal communications within DFAT concerning the prognosis for the ADCNET contract. 1539 As I earlier indicated, the Commonwealth has invited me to attribute 10 per cent to the non-contract related work and 90 per cent to that which was contract related. I cannot accept this proposition. Far from being "more than adequate and reasonable", it would in all probability dramatically over-compensate the Commonwealth. Given the state of the evidence, I am left almost completely in the realm of "guestimation" - save that the evidence of non-contract related work does satisfy me that it was of considerable dimensions. In these circumstances, I consider it necessary to err on the side of caution. I am not satisfied that it would be appropriate to attribute more than forty per cent of Les Cook's time in this period to compensable contract-related activities. I would in consequence award damages under this head in the sum of $150,000. 1540 The final comment I would make is that I reject a separate argument advanced by GEC Marconi that to the extent that Les Cook was performing services (albeit late) for the Commonwealth that were envisaged by the consultancy agreement, the only loss suffered was the increased cost to the Commonwealth resulting from the increase in Les Cook's rates over what they were prior to May 1996. It may well be the case that had the contract been performed on time, the Commonwealth might not have enjoyed the benefit of Les Cook's non-contract related services to the extent it did. Nonetheless the breach occurred and actual expenditure was incurred in consequence. That expenditure up to the execution of the Variation Agreement is a proper subject of compensatory damages.
(3) The Edmund Barton Building Expenses 1541 By way of preface I should note that in its reply submissions, the Commonwealth again `has sought to change entirely the basis upon which this head of damage is claimed. The change reflects that made in relation to the claim for "Project Management Cost" referred to above. As originally made, the claim was for loss flowing from breach of the original Head Contract. It is now sought to be explained as wasted expenditure in the performance of the original Head Contract. I do not consider that the change made here would be likely to have had any significant prejudicial effect upon BHP-IT's conduct of its case. As a matter of convenience, I have dealt with the claim on the basis originally advanced and responded to by BHP-IT and GEC Marconi. Whichever way the claim is put, it would seem that the same issue of principle (considered below) arises and the claim covers the same period in each instance. 1542 Under the Head Contract the Commonwealth was obliged to provide (a) office accommodation for BHP-IT's project team and (b) a Test and Integration Facility ("TIF") for the development, integration and acceptance testing of the ADCNET software. When DFAT relocated to the RG Casey Building in November 1996, the BHP-IT and GEC Marconi project teams were relocated to the Edmund Barton Building. The Commonwealth paid the costs of construction of the TIF at that site as also the fitout of office accommodation for BHP-IT and GEC Marconi staff. When GEC Marconi left the project on 10 December 1996, DFAT decided to move the BHP-IT team to the RG Casey Building and to provide it accommodation and a TIF in that building. 1543 The present head of damages claims the cost of constructing the TIF and the office fitout at the Edmund Barton Building and costs associated with the leasing of office accommodation for BHP-IT personnel and for the TIF from November 1996 to April 1997. 1544 The basis of the claim is that, if the Head Contract had been performed to schedule (ie by May 1996), the need would not have arisen from the Commonwealth to continue to supply accommodation and a TIF to the BHP-IT project team.
(a) Contractual Setting 1545 Clauses 7.1 and 7.2 of the Head Contract obliged the Commonwealth to supply the CSI prescribed in Schedule 6. That Schedule in turn required it to provide BHP-IT with reasonable office accommodation and support facilities, reasonable furniture and fittings and necessary accommodation for testing facilities: Schedule 6, cl 2-cl 6. Clause 9E.2 of the Head Contract required the Commonwealth to provide the necessary testing facilities. 1546 I merely note the obvious that in incurring the costs of construction of the TIF and of fitout at the Edmund Barton building and in providing accommodation for the BHP-IT project team and the TIF at that building, the Commonwealth was acting in furtherance of its contractual obligations to BHP-IT.
(b) Factual Setting 1547 In April 1994 (well prior to the execution of the Head Contract) a risk analysis was undertaken by Mr Nichols of the proposed R3 contract and copies were supplied to Mr Brent and Mr Vile of BHP-IT. The first of the "High Impact Risks", specified though categorised as a "Low probability" was that the PSI would be unable to complete the project before the move of DFAT to its new building. 1548 While Mr Brent in cross-examination said he had no recollection of receiving and reading the document, I am prepared to infer that he did receive and read it. 1549 It had become apparent by the beginning of 1996 that the Head Contract would not be completed by the time fixed for the move to the RG Casey Building and DFAT then began to explore alternate office accommodation for the ADCNET project team. That survey involved consideration both of Commonwealth owned and commercial properties. 1550 By mid-1996 papers had been prepared evaluating the various options (six in number) and a recommendation was made that the ADCNET team be relocated to the Edmund Barton Building. I would note in passing that the costing for this for a 23-month period was calculated at $767,600 while the costing for the same period in commercial offices (at a considerable distance from York Park) was $744,500. The recommendation to relocate to the Edmund Barton Building was agreed on 9 August. 1551 In September 1996 Mr Brent raised CR2081 requesting two person days of effort for the provision of "advice/consultation/assistance in planning the relocation of IPD from Admin Building to EBB". The Commonwealth approved that CR on 9 September. 1552 Mr Graeme Nichols of DFAT arranged for the management of construction of the fitout for office accommodation and for the TIF. His witness statement contains a table identifying the contractors and suppliers that were involved in relocating BHP-IT's project team to the Edmund Barton Building and thereafter to the RG Casey Building, and the costs thereby incurred by the Commonwealth. Those costs were in the sum of $215,287.15. Of this, the sum $35,000 was recovered by DFAT from the Department of Primary Industries and Energy ("DPIE"), leaving the claim made in respect of relocation expenses at $180,287. 1553 I would note the following of the above costs and expenses incurred. First, much the greater part of them were attributable to work done by what was then an administrative entity of the Commonwealth, Asset Services. That work, in other words, was done by the Commonwealth itself. Secondly, the sum credited from DPIE was on account of facilities left by DFAT in the Edmund Barton Building on its departure to the RG Casey Building. DPIE was the "lessee" of the building and the DFAT occupation of it was by way of "sub-lease" from DPIE. 1554 The area occupied by the BHP-IT team in the Edmund Barton Building was office accommodation (628m2), the TIF (189m2) and storage (77m2). The building itself was owned by the Commonwealth. The Commonwealth claims $104,238 on account of "rental paid" for leasing the above space. The rent payable was $295/m2 for the office accommodation and the TIF and $105m2 for the storage. There were as well payments made for security and cleaning: see Mr Down's DFAT minute of 9 December 1996. 1555 It would seem that the space so occupied was previously occupied by DFAT.
(c) Submissions, Findings and Conclusions 1556 BHP-IT contests what I will generically call the "relocation costs claim" (ie fitout, TIF, etc) on the basis that the Commonwealth waived this claim when it agreed to CR2081. It challenges the "rental claim" on the basis that the Commonwealth had no obligation to pay rent to itself and suffered no actual loss in the circumstances. 1557 GEC Marconi submits that both claims are too remote. It likewise submits in relation to the rental claim that no actual additional cost was incurred by the Commonwealth and that there is no proper analogy to be drawn between this claim for breach of contract and those rules of tort law that entitled a person to an award of general damages for loss of use of, or damage to, property and which are typified in the holding in The Mediana [1900] AC 113. 1558 Before considering these defences in turn I should indicate the following. First, I am satisfied that the Commonwealth properly can be said to have incurred the relocation costs it claims. While only a relatively small part of these costs were reflected in payments made to independent contractors - the bulk being attributable to work done by Asset Services - I consider that the Commonwealth is entitled to claim the reasonable cost of those services. No challenge having been made to the sums claimed on account of them, I am prepared to accept the figures provided by the Commonwealth. 1559 Secondly, despite the apparently formal ritual of entering into what were described as "leases" and "sub leases" and of invoicing for, and pay, rent, the "rental" charged DFAT was merely an infra-governmental accounting arrangement. I need not speculate upon the reason for this practice (it has not been the subject of evidence). However, I do infer that such "leases" were required to be entered into as a result of Government policy at the time. 1560 BHP-IT's waiver defence can be dispensed with shortly. CR2081 was raised for the purpose of properly managing the office relocation, and it sought payment to BHP-IT for the advice and assistance it might render in planning the move to the Edmund Barton Building. Whether or not that advice resulted in the Commonwealth incurring less cost than it might otherwise have done so - there is no evidence on this matter - giving BHP-IT the opportunity to proffer it without cost to itself, in no way suggests that the Commonwealth intended to waive, or could be taken as having waived, its rights against BHP-IT for delay costs that were reflected in the need to make the move. I do not pause to discuss what the term "waive" might be intended to signify in BHP-IT's submission. I can see no basis for suggesting that CR2081 grounded an estoppel, involved an election between alternative and inconsistent rights, or involved in some other fashion the intentional relinquishment of a known right. 1561 I need only consider the remoteness defence in relation to BHP-IT. I am satisfied that BHP-IT was made aware of, and understood the significance of, the timing of completion of the Head Contract relative to the projected move to the RG Casey Building. From early in 1994 both parties were well aware from communications inter se of the risk late delivery posed because of the projected move and they contracted in that knowledge. And BHP-IT knew what were the Commonwealth's obligations in relation to the provision of accommodation and of a TIF. BHP-IT in consequence accepted that if, because of its delay, DFAT moved to the RG Casey building before the actual completion of the Head Contract but after the agreed completion date, it bore the risk of damages arising from the Commonwealth's continuing need to perform its obligations in these changed circumstances. 1562 The common defence put by BHP-IT and GEC Marconi appears at first blush to be unanswerable if the Commonwealth's claim is seen simply as a claim for reimbursement of a rent paid, ie, as a claim for an actual cost incurred. What is clear, notwithstanding the modern practice in public administration of treating the departments and agencies of the Executive Government as separate and independent entities, is that no loss was incurred by the Commonwealth resulting from its having made a rental payment to itself. Whatever the reason for requiring it, the rental payment was no more than an infra-governmental accounting device. It had no legal reality. Neither did the alleged lease in respect of which the "rent" was paid. 1563 As originally put, the claim was analogised to that arising in tort when a person loses the use of a non-profit earning chattel through the tortious act of another. As was said by Lord Halsbury LC in The Mediana [1900] AC 113 at 116: "where by the wrongful act of one man something belonging to another is either itself so injured as not to be capable of being used or is taken away so that it cannot be used at all, that of itself is a ground for damages." 1564 I have referred to the analogical use of this principle in considering BHP-IT's damages claim in its cross-claim against GEC Marconi. I will not repeat here what I said there: BHP-IT's First Cross Claim: Costs of Performing the Variation Agreement, (b) Submissions and Conclusions. 1565 As finally put, the Commonwealth's submission is that the principle to be derived from the case law is that where a party is wrongfully deprived of its property and uses its own resources to remedy the wrong it is entitled to an award of general damages for the use of its resources. I should add that particular reliance in this was placed upon the decisions of Higgins J in Commonwealth of Australia v Silverton Ltd (1997) 130 ACTR 1. 1566 It is, in my view, unnecessary to consider whether the Commonwealth's submission accurately describes the law of this country. My reason for this is that the principle advanced is itself inapt to describe the claim actually being made by the Commonwealth. 1567 Put at its most general that claim is for loss suffered by the Commonwealth in having to perform its contractual obligation for a period greater than that originally contracted for under the Head Contract because of delay in BHP-IT's performance of its obligation. It was the manner in which the Commonwealth elected to discharge that continuing contractual obligation to BHP-IT (ie by continuing to use its own property rather than commercially rented offices) that deprived it of the use of its own property. Nonetheless, it was because of BHP-IT's breach and the delay it occasioned, that that contractual performance needed to be rendered at all. The Commonwealth was being obliged to commit its resources beyond the period originally contracted for in the Head Contract, because of BHP-IT's breach. 1568 The questions raised by this are, first, whether having so to commit its resources is properly to be characterised as a loss for the purposes of an award of damages for breach of contract; and, secondly, if it is, how are those damages to be assessed. 1569 As to the first of these questions, I am satisfied that a compensable loss was suffered. The Commonwealth had to continue performing obligations owed to BHP-IT requiring a continuing commitment of resources because, and only because, of BHP-IT's breach. This involved a loss of use of property, not because of some wrong or injury to the property itself: cf The Mediana, above; Anthanasopoulos v Moseley [2001] NSWCA 266; Nauru Local Government Council v New Zealand Seamen's Industrial Union of Workers [1986] 1 NZLR 466; and see generally McGregor on Damages, para 1349ff (16th ed); Tilbury, Civil Remedies, vol 2, [12028]; nor because it was actually kept out of that property by reason of delay in the other party's performance: cf Restatement of Contracts, Second s348 and Comment (b); Dobbs, Law of Remedies, vol 3, 443ff (2nd ed); but because of the continuing need to commit its property in consequence of the other party's breach. In the immediate circumstances it is more than coincidental that BHP-IT, because of its breach, obtained the advantage of an extended performance at the Commonwealth's expense. In saying this I am not suggesting that the Commonwealth's loss is the benefit derived by BHP-IT as such: Alucraft Pty Ltd (In liq) v Grocon Ltd (No 2) [1996] 2 VR 386 at 400-4001; or for that matter, that a claim in restitution independent of contract was available to the Commonwealth (such being clearly not the case: see Trimis v Mina [1999] NSWCA 140 at [55]). I am merely emphasising that the benefit or advantage provided to BHP-IT was a manifestation of the loss suffered by the Commonwealth. 1570 When one turns to the quantification of that loss, problems become immediately apparent. The present case is not one of an actual expenditure made by the Commonwealth in providing accommodation. Nor is it one in which there is any evidence of an opportunity otherwise to use the Edmund Barton Building profitably which was lost to the Commonwealth. And the Commonwealth was not, on the evidence, using this building for income earning purposes. Can it be said, then, that it suffered no pecuniary loss? 1571 I referred above to Lord Halsbury's statement of principle in The Mediana that establishes loss of use of property from a wrongful act as being itself a ground for damages. Where such property is not income producing or for that matter is not capable of being used for income producing purposes, or where a substitute is not hired, leased etc during a period of repair, a like problem in quantification of loss can arise for reasons similar to those I have noted above. This, no doubt, explains the Commonwealth's resort to The Mediana principle in this setting as that principle has been used to justify the award of general damages for loss of use of non-profit earning property: see generally McGregor on Damages, para 1349 (16th ed); see also Westwood v Cordell [1983] Qd R 276 at 278-279. 1572 The Mediana principle is clearly part of Australian law: see Tilbury, above, at 205 and the cases there referred to; Price v Commissioner of Highways [1960] SASR 329; Commissioner for Railways v Luya, Julius Ltd [1977] Qd R 395. Nonetheless, it has been commented fairly that there is uncertainty about the appropriate method of calculation of damages in cases to which it applies: see Waddams, The Law of Damages, s1.2050 (3rd ed). A variety of methods have been used in different contexts and include the rental value of the property concerned; the costs of maintenance and the depreciation of the property for the period in question; and interest upon capital value. These different methods are probably justified, as Professor Waddams suggests, "on the basis of convenience of assessment": above, at s1.2140. I do not consider it necessary to enlarge upon them here. 1573 I was not taken to, and I have not been able to discover, a decided case similar to the present. Such reported loss of use of property cases as there are, are of two general varieties: the first, where the loss arises from a tort occasioning damage to the property itself; the second, where a breach of contract delays the use of property (eg because of delay in completion of a building on the innocent party's land). It has been said of English law in the latter class of case that the delay damages should, in principle, generally be the rental value for the use of the premises for the period of delay: see McGregor on Damages, para 1146 (16th ed). 1574 In American jurisdictions the rule commonly adopted in breach of contract cases where the damage caused by a delay in performance takes the form of loss of use of an item of property, is that the damages are generally measured by the rental value of the property involved: 22 Am Jur 2d, "Damages", s70. Restatement of Contracts, Second, s348(1) and Comment (a); for the parallel tort law measure, see 22 Am Jur 2d, above, s444, s447; Dobbs, above, s5.15; see also Westwood v Cordell, above. In Dobbs, Law of Remedies, the operation of the rental value approach in a building contract setting has been described in the following way: (vol 3, 443): "When the contractor breaches by delay in delivering the completed work, the owner is entitled to damages for the delay. Those damages are usually measured by the rental value of the land during the period of delay. The rental value is the value of the land with the building in its completed state as contracted for, not the value of the unimproved or partly improved lot. Rental value is the proper measure even though the owner would not in fact have rented the land and did not in fact need the building on the date called for. Like many other damages awards, the rental value measure may be considered a "default" measure, a kind of liquidated damages to be used unless the parties provide something they prefer. It is close enough to accurate compensation, easy to use, and far preferable to an unlimited award based on subjective guesses about the worth of delay to particular plaintiffs." 1575 In the present case resort to a "default measure" is inescapable. In the circumstances, I consider a variant on the fair rental measure is appropriate. In saying this I recognise (a) that the contractual principle referred to above was not designed to deal explicitly with the unusual circumstances of a case such as the present; and (b) that the Edmund Barton Building, as Commonwealth property, may not have had a rental value as such, but it did have a usable value to the Commonwealth. 1576 If the Commonwealth had accommodated the BHP-IT project team in commercially rented premises, it would have been entitled to claim the rental paid as damages: cf United States v Wyckoff Co 271 US 263 at 267 (1926). It had its own offices instead. Those offices clearly had a usable value to the Commonwealth. Both before and after their occupation by BHP-IT, they were used by the Government departments. 1577 The decision to use the Edmund Barton Building was taken after evaluating other options including a commercial option. An aspect of that evaluation related to the actual rental charged for commercial accommodation and the "notional rentals" the Commonwealth charged itself for its use of its own buildings. Where the Commonwealth has taken the step of placing a cost to itself upon its use of its own premises - a cost which is apparently comparable to rentals charged in the private sector (and it has not been suggested otherwise in this proceeding) and which I infer is related to the efficient use of public resources - that cost (not having been challenged in its amount) can properly be taken to represent usable value of that property to the Commonwealth. As such, it provides an appropriate measure of the damages that are recoverable by the Commonwealth. 1578 I am satisfied then that the sum of $104,238 is recoverable by the Commonwealth on account of its having to provide accommodation and the TIF to BHP-IT in the Edmund Barton Building. That sum is recoverable, not on account of rental actually paid for that accommodation, but as damages for the loss of use of the premises concerned because it was obliged to provide such accommodation by reason, and only by reason, of BHP-IT's breach of contract. 1579 I am similarly satisfied that the relocation costs for fitout etc of the Edmund Barton Building of $180,287.00 would not have been incurred but for BHP-IT's breach, even though the need to make that expenditure was necessary if the Commonwealth was to perform its continuing obligation to BHP-IT.
(4) The RG Casey Building Expenses 1580 Given my conclusion in relation to the effect of the Variation Agreement, damages under this head could only run from May 1997 (when the BHP-IT project was relocated from the Edmund Barton Building) until 19 December 1997 (the date of the Variation Agreement).
(a) Additional Factual Material 1581 The "Core Occupancy Agreement" between Australian Estate Management (a part of the Department of Administrative Services) and DFAT for the RG Casey Building was, on Graeme Nichols' evidence, executed on 14 June 1996. That document was not in evidence, though an agreement purporting to be a "Core Occupancy Agreement" that was signed by the Secretary of DFAT on 18 December 1995 was tendered. The latter document does not have annexed to it the Schedule that dealt with rents payable. 1582 The evidence concerning the "rental" paid is in a less than satisfactory state. I have no actual document before me prescribing either the rent to be paid for the building itself, or that which was attributable to the BHP-IT project team's accommodation and to the TIF. The "invoices" for the rent were not put in evidence. I imply no criticism in this as to have required that all relevant invoices for all claims be tendered would have been both burdensome and profligate given the volume in question. At best I have hearsay evidence of the rentals although there is accurate evidence of the areas occupied by the BHP-IT project team and the TIF and of their locations. The rate said to have been charged was $388 per square metre. This may well have been less than the actual rate for the period in question but I am prepared to accept that such was the rate for present purposes. 1583 The space in respect of which DFAT was paying rent was an area for which it would have had to pay rent in any event.
(b) Findings and Conclusions 1584 In light of my conclusion in relation to the Edmund Barton Building rental claim, a like conclusion follows in relation to this claim for the period May to December 1997. The actual amount paid for the period in question is still to be calculated in respect of the areas occupied by the BHP-IT project team. 1585 I note that in its submissions BHP-IT has contested whether the area in respect of which the claim was made was occupied solely by members of the BHP-IT (or ADCNET) project team. There is no evidence that such was not the case and I allow no offset on account of it.
(5) The Cost of Expedited Release 3 Software 1586 This head of claim is for the $509,796 paid to BHP-IT under CR007 for the development of the ER3 software. CR007 was entered into after the 1997 Variation Agreement. For that reason alone the claim is not maintainable.
(6) CONCLUSION 1587 I find that the Commonwealth is entitled to an award of damages under the following heads and in the amounts indicated: (i) project management costs - $150,000 (ii) Edmund Barton Building expenses - $284,525 (iii) R G Casey Building expenses - still to be calculated.
part vi: conclusion 1588 The burden of this proceeding cannot be encapsulated satisfactorily in précis form. Accordingly, I will do no more than record here the outcomes of the various claims and cross-claims. First, I have rejected all of the claims made by GEC Marconi save that relating to delay and prolongation which will be stood over for further hearing on a date to be fixed. 1589 Secondly, I have found that BHP-IT has made out its claim that GEC Marconi repudiated its contract with BHP-IT. However, I have not accepted significant parts of the damages claims advanced by BHP-IT. I also have found that BHP-IT is entitled to call upon the performance guarantee given it by GEC Marconi's parent company, GEC Marconi Australia. 1590 Thirdly, BHP-IT has made out a claim of breach of contract by the Commonwealth, though not to the extent that it has claimed. I have not been asked and have not attempted to assess damages for the breach found. I have rejected its claim against the Commonwealth based on the Trade Practices Act 1974 on technical grounds, though I am satisfied that the Commonwealth did engage in misleading and deceptive conduct in an aspect of its dealing with BHP-IT. 1591 Fourthly, I have found that the Commonwealth is entitled to claim damages from BHP-IT on account of its failure to perform its contract on time. Those damages, though, are claimable only for a limited period and are relatively small in amount. 1592 The only order I propose to make at this stage is to direct the parties to bring in short minutes of order to give effect to these reasons. I will adjourn to a date to be fixed consideration of the question of costs. I certify that the preceding one thousand five hundred and ninety-two (1592) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.
Associate: Dated: 10 February 2003 Counsel for the Applicant, First Cross-Respondent, Second Cross-Respondent: Mr J B Simpkins SC, Mr N A Nicholls
Solicitor for the Applicant, First Cross-Respondent, Second Cross-Respondent: Colin Biggers & Paisley
Counsel for the Respondent, First Cross-Claimant, Fourth Cross-Respondent: Mr N J Young QC, Mr S E Marks, Mr R J Harris
Solicitor for the Respondent, First Cross-Claimant, Fourth Cross-Respondent: Corrs Chambers Westgarth
Counsel for the Third Cross-Respondent, Second Cross-Claimant: Mr J S Hilton SC, Mr R Vivekananda
Solicitor for the Third Cross-Respondent, Second Cross-Claimant: Australian Government Solicitor
Dates of Hearing: 18-21 June, 25-28 June, 2-6 July, 23-26 July, 30 July-2 August, 6-10 August, 13-17 August, 20-21 August, 23 August, 22-25 October, 1-2 November, 5-8 November, 21-23 November, 26-30 November, 3-7 December, 10-13 December 2001; 18-19 March, 25-26 March, 9-12 April, 26 April, 30 April, 22 November 2002.
Date of Judgment: 12 February 2003
SCHEDULE 1 Table of Acronyms/Glossary A Acceptance Testing Process to determine whether a configuration item of computer software complies with its allocated requirements in the Functional Requirements Specification. In the case of ADCNET, also referred to as Formal Qualification Testing. ADCNET Australian Diplomatic Communications Network The communications network used by DFAT to transmit and disseminate classified and unclassified inter-governmental information. ADD Architecture Design Document Sets out hardware and software components of a computer system. API Application Program Interface API Specifications Specifications for the Cut-down STUBS Emulator. Applixware COTS software package. ATD 1. Acceptance Test Data Data required to undertake acceptance tests, prepared in accordance with clause 9E.4 of the Head and Sub-Contracts. 2. Acceptance Test Description Document used to set out and describe the test cases that would be used to acceptance test the software developed under the Head Contract and Sub-Contract. ATP Acceptance Test Plan Contractor-prepared document describing the tests used to ensure that operative software meets capability and capacity requirements. AWADI AWA Defence Industries Pty Ltd Licence-holder for the commercial exploitation of the DSTO-developed STUBS technology. AWADI Untrusted Software STUBS software component. B BHP-IT BHP Information Technology Pty Ltd BTM Base Team Member Build Installable subset of software, usually at CSCor CSCI level, that can be separately developed and tested. C CA Contract Amendment Form CDR Critical Design Review Second tier of formal review process - after PDR. CFS Customer's Functional Specifications Specifications set out in Schedule 1 of the Head and Sub-Contracts; includes the FRS and the ADD. Contractor In the ADCNET Contracts, GEC Marconi was the Contractor in the Sub-Contract, and BHP-IT was the Contractor in the Head Contract (cf Customer) COTS Commercial Off The Shelf CR Change Request Document used to initiate changes to the Head Contract and/or Sub-Contract. CR001; CR3049 etc Particular change requests identified sequentially by number. CSC Computer Software Component Distinct part of a CSCI, made up of several CSUs. CSCI Computer Software Configuration Item Top-level sub-component of a software application, normally comprises several CSCs. CSE Contractor Supplied Equipment Products and services to be supplied by the nominated Contractor under the Head and Sub-Contracts. CSD Corporate Services Division of DFAT (see Schedule 4). CSI Customer Supplied Items As referred to in clause 7 and schedule 6 of the Head and Sub-Contracts. CSU Computer Software Unit Smallest element of software that can be independently tested. Several CSUs in a CSC. Customer In the ADCNET Contracts, the Commonwealth was the Customer in the Head Contract, and BHP-IT was the Customer in the Sub-Contract (cf Contractor). CUT Code and Unit Test Cut-down STUBS Emulator Partial Surface Emulation that was ultimately developed under CR 3049 Cutover Process of progressively switching from an old computer system to a new computer system while maintaining contact with the external environment. D Deep Emulation Emulation that represents the full functionality of the emulated hardware or software (cf Emulation; Surface Emulation). Deliverable Product or document to be supplied by the Contractor under the Head or Sub-Contract. DFAT Department of Foreign Affairs and Trade DoD Department of Defence DPSI Defence Preferred Systems Integrator DSB Diplomatic Security & Countermeasures Branch of DFAT (see Schedule 4). DSD Defence Signals Directorate Australia's national authority for signals intelligence and information security. DSTO Defence Science and Technology Organisation Part of the Department of Defence. Role is to apply science and technology to the defence of Australia and its national interests. E EASAMS Australia The original sub-contractor on the ADCNET project; subsequently taken over by GEC Marconi. E2/E3/E5/E6 etc Scale of ITSEC Evaluation/Accreditation (see ITSEC Evaluation). Emulation Hardware and/or software that imitates the functional capability of other hardware/software. ER3 Expedited Release 3 Subset of software to be developed under the Head Contract as amended in December 1997. The ER3 software subset was to provide the message switch functions required to replace the IBM message switch as defined in CR007. F Fixed Price Contracts The Head Contract and Sub-Contract signed in September 1994 providing for the development and integration of Release 3. FQT Formal Qualification Testing Final acceptance of Release 3 software - see Acceptance Testing. FRS Functional Requirements Specification Detailed list of requirements for the ADCNET software. Various versions of the FRS were made over time as the project evolved. Full Surface Emulation Emulation that represents all functionality at the interface of a piece of software or hardware. Distinct from Partial Surface Emulation which represents only a subset of interface functionality, and Deep Emulation which represents all functionality. Function Point Analysis Software estimation model. G Gateway (Trusted) Equipment and/or software processes that allow computers or networks with dissimilar characteristics to exchange information. In the case of ADCNET, trusted gateways allow (a) information exchange between ADCNET subsystems processing differently classified material and (b) between ADCNET subsystems and external systems. GEC Marconi Systems Pty Ltd Company that took over EASAMS Australia. GEC Marconi Australia Pty Ltd Parent company of GEC Marconi Systems Pty Ltd. GMS GEC Marconi Systems Pty Ltd H Head Contract Contract ITB/002 between BHP-IT and the Commonwealth; one of the back-to-back fixed-price contracts signed on 14 September 1994 for the development and integration of Release 3. HP Hewlett Packard Company that provided workstation computers, operating systems and other hardware and software components for the ADCNET System. I IBM message switch Computer System located in DFAT, Canberra, that performed tasks of transmitting, queuing and disseminating diplomatic 'cables'. Original IBM message switch was implemented in 1979 and replaced by the ER3 message switch in June 2000. The system controlled the dissemination of cables according to attributes such as addressee, classification and subject identifiers. IMB Information Management Branch of STUBS (see Schedule 4) Interface Emulation See Surface Emulation. Integration Testing The phase in which all constituents of the IPD deliverable are brought together for integration, along with the BND component. IPD Information Processing Domain The components of ADCNET which were to provide formal and informal message processing, information retrieval and office automation facilities. ITB Information Technology Branch of STUBS (see Schedule 4). ITB/002 Head Contract between BHP-IT and the Commonwealth. ITD Integration Test Description ITSEC Information Technology Security Evaluation Criteria DSD-endorsed criteria used to assess the security of a system. K KDC Key Distribution Centre A STUBS component KG84 A military-standard encryption device. KIV-7 A military-standard encryption device; part of the STUBS replacement proposal under CR 3057. L, M, O LAN Local Area Network A network of computers in a geographically limited area connected by cables or radio signals. Distinct from Wide Area Network. Milestone A contractually designated stage in the performance of the contracted work, on the achievement of which a progress payment was made. There were 7 such Milestones in the Head and Sub-Contracts. Operating System Master control program that manages a computer's internal functions, such as accepting keyboard input, and that provides a means to control the computer's operations and file system. P Partial Surface Emulation Emulation that represents only a subset of the interface functionality of a piece of software/hardware. PDR Preliminary Design Review First stage of formal review process - before CDR. PMT Project Management Team PMR Project Management Report PSI Prime Systems Integrator BHP-IT was the PSI for Release 3. R Release 1 The original release of ADCNET software, which predated the Fixed Price Contracts. R3 Release 3 Software the subject of the Fixed Price Contracts. ROM rough order of magnitude S SATIN Secure Australian Telecommunications Information Network SDD Software Design Document Systems Design Document SDP Software Development Plan SDSDD Software Development System Design Document Sealing A trusted process which converts an unsealed object into a sealed object. Senior Executive See Schedule 4. SIS Software Interface Specification SMOG Single Message Outgoing Gateway SO Standing Offer Agreement SPC Systems Policy Committee (see Schedule 4) SPME STUBS Project Management Executive (see Schedule 4) SRS Software Requirements Specification STARLIGHT Security technology developed by DSTO after STUBS. STD Software Test Description STUBS Electronic security gateway devices invented by DSTO and licensed for commercial exploitation by AWADI. Hardware components of the STUBS Technology include Sealers, Gateways and Key Distribution Centres. The technology also included Trusted and Untrusted software components. Sub-Contract Contract ADC/001 between GEC Marconi and BHP-IT; one of the back-to-back fixed-price contracts signed on 14 September 1994 for the development and integration of Release 3. Surface Emulation Emulation of that part of a piece of software or hardware which interfaces with other elements of a system. System All components of ADCNET, including computers, network equipment, software and procedures processing all levels of classified and unclassified information. System Security Policy A top level statement of the risks faced by an electronic information system or collection of systems, the counter measures to be applied within and outside of the systems, and the responsibility for those measures. T TASDD Test & Acceptance System Design Document TDP Test Description Procedure Test Harness A type of emulation, being a set of scripts/short programs that exercise various files or calls from a database to act as input to, and collect output from, the software being tested - see Contract Schedule 9 Cl 2.2.4.1. Testable 'Shall' Requirement defined in the FRS which must be demonstrated for completion of Formal Qualification Testing. TIF Test & Integration Facility TRR Test Readiness Review Third tier of review process - after Critical Design Review. Trusted Any component of the system that was 'trusted' could be relied upon to uphold the System Security Policy. U Unit Test Test of a CSU to determine whether it meets the capability requirements established in the SDD. UNCLGUARD Unclassified Guard Part of the system developed to replace IBM message switch in conjunction with ER3. W WACC Weighted Average Cost of Capital WAN Wide Area Network Data communication network operating over a commercial infrastructure, eg telephone lines.
SCHEDULE 2 Principal Actors Note: An asterisk (*) denotes persons who gave evidence at the hearing. GEC Marconi *Roger Cooke GEC Marconi Project Manager; originally in charge of the ADCNET project team prior to Release 3; later became Canberra Branch Manager of GEC Marconi Systems from 1994 to 1997. *Tim Harris GEC Marconi Systems Engineering Manager and Integration & Acceptance Test Manager; a software engineer whose principal responsibility was the integration and acceptance testing of the ADCNET Software. *MuraliVaratharajan GEC Marconi Systems Engineer and later IPD Development Manager; a software engineer whose principal role in the development of the ADCNET Software was to manage of a team of GEC Marconi software engineers/programmers. *Peter Wishart GEC Marconi Project Manager for the ADCNET project from September 1994 until January/February 1996. Also Technical Manager. *Ron Becker General Manager (Commercial) of GEC Marconi from April 1990 to March 1999. *Ian Sharp GEC Marconi General Manager, appointed in November 1995 (replacing Lindsay Pears); subsequently Managing Director of GEC Marconi from July 1996. *Howard Breden Commercial Manager of GEC MARCONI and then Commercial Manager for C3I Division of GEC Marconi Systems. *Peter Newton Consultant engaged by GEC Marconi to develop and build the STUBS Emulation Software pursuant to Change Request 3049. Edward Goldsmith GEC Marconi Project Manager for the ADCNET project; succeeded Peter Wishart in January/February 1996 and left the project in August 1996. Samy Software engineer/programmer involved in the costing of Change Request 3057 for the development of an alternative security gateway mechanism for ADCNET. *Professor Raymond Offen Expert in software development called by GEC Marconi to give expert opinion and to comment on Dr Lewis' report. Lindsay Pears GEC Marconi General Manager up to November 1995 (replaced by Ian Sharp). Chris Skinner Managing Director of GEC Marconi from April 1996 to June 1996 (replaced by Ian Sharp). Ian Otto GEC Marconi Systems Architect *Daryl Dorfan Accountant retained by GEC Marconi.
BHP Information Technology *Kyrill Brent BHP-IT's ADCNET Project Manager from pre-1994 to May 1997. *Ian Dart National Manager for Systems Integration Services (SIS) from 1994 to 1995. Appointed Group General Manager of BHP-IT in 1996. Mike Haddad Senior Commercial Manager of BHP Information Technology. Glenn Vile Contract Manager for BHP Information Technology; assisted Robert Nichols of DFAT with the drafting of the proposed contract with AWA Defence Industries for the proposed purchase of the STUBS devices. Margaret Beattie BHP-IT Corporate Legal Counsel Ramanathan Vishwanathan ("Vish") Software systems architect responsible for the development of the ADCNET software after GEC Marconi terminated the Sub-Contract with BHP-IT (Consultant to BHP-IT). *Manfred Rentz Project Manager of the ADCNET project taking over from Kyrill Brent in May 1997; with Vishwanathan was responsible for the development of the ADCNET software, in particular the Expedited Release 3 software *Ian Fenwick System Support Manager responsible for BHP-IT's accounting systems. Nick Brazil BHP-IT testing engineer David McGregor BHP-IT test and integration engineer *Gerard Hammond BHP-IT Vice President (Finance) from June 1996 to May 2000.
Commonwealth (DFAT) *Les Cook ADCNET Project Manager contracted by DFAT to help oversee the project. *Robert (Bob) Nichols DFAT officer; Director of section responsible for the development of the ADCNET software between 1994 and 1998; conducted negotiations with AWA Defence Industries on behalf of DFAT for the proposed procurement of the STUBS devices. *Kim Jones Deputy Secretary of DFAT from 1993 to 1998; the ADCNET project fell within his sphere of departmental responsibility. Geoff Allen Assistant Secretary of the Diplomatic Security and Countermeasures Branch of DFAT - the Branch responsible for the computer security requirements of the Department, between 1993 and 1996. *Anthony Skinner Assistant Secretary of the Information Technology Branch of DFAT - the Branch responsible for the ADC Network and the development of the ADCNET software, between 1990 and 1996. *John Crighton First Assistant Secretary of the Information Management and Property Division of DFAT from 2000 to 2001. *Robert Cotton First Assistant Secretary of the Corporate Services Division of DFAT from 1993 to 1997. *Damian Farrell DFAT consultant responsible for project managing the development and implementation of the UNCLGUARD security gateway mechanisms. *Graeme Tinney DFAT officer, who in conjunction with others, conducted and oversaw the acceptance testing of the Expedited Release 3 software. *Graeme Nicholls DFAT officer who arranged for the fitout and relocation of the BHP Information Technology/GEC Marconi ADCNET project team from the Administrative (now known as the Sir John Gorton) Building to the Edmund Barton Building. *Denis Johnston DFAT officer whose prime responsibility was the continued operation and management of the IBM Classified System; also made arrangements to relocate the IBM Classified System to the RG Casey Building. *Joseph Bracher Professional accountant retained by the Commonwealth to assist in quantifying its damages claim. *John Nothdurft DFAT Officer responsible for overseeing cable analysis and producing statistics in relation to cable printing and dissemination. *Peter Sams DFAT Officer responsible for the procurement of paper and certifying invoices for payment. *Dr Edward Lewis Expert in software development called by the Commonwealth to give expert opinion and to comment on Dr Offen's report. John Campbell Assistant Secretary of Corporate Services Division. Member of the IT Executive.
Commonwealth (DoD) Dr Don Sinnott DSTO Scientist Chief of the Information Technology Division within DSTO.
AWADI Nick Davias AWADI STUBS Project Manager; responsible for the technical development and eventual manufacture of the STUBS devices. Mark Hender Marketing officer in AWADI; responsible for the sale of the STUBS devices to DoD and DFAT.
SCHEDULE 4 Principal Committees and Groups Name Parties/Description Acceptance Test Team DFAT, BHP-IT, GEC Team of project staff responsible for preparing and conducting acceptance tests. ADCNET Security Sub-Committee DFAT, DSD Chaired by the head of DSB. Membership included the head of ITB, the ADCNET Project Manager, DFAT technical staff and DSD representatives. ADCNET Steering Committee DFAT; BHP-IT Coordinated all aspects of the ADCNET project in its early stages. GEC Marconi representatives were also on the committee in an advisory role. CSD (Corporate Services Division) DFAT Management division of DFAT to which the IMB reported. DSB (Diplomatic Security and Countermeasures Branch) DFAT Responsible for all aspects of security for the DFAT including information communication network security. IMB (Information Management Branch) (Formerly ITB (Information Technology Branch)) DFAT Responsible for DFAT's data storage and communication services, as well as library and information services. STUBS Advisory Board DoD, AWADI Board set up to advise on various issues concerning, principally, the development and marketing of the STUBS devices. STUBS Project Management Executive AWADI, DoD, DSTO Principally an AWADI group that met regularly (either fortnightly or weekly) to oversee the technical development of the STUBS devices. Systems Policy Committee DFAT Oversaw strategic policy directions relating to information technology systems within DFAT.
GEC Marconi Systems Pty Limited
BHP Information
GEC Marconi Systems Pty Limited v BHP Information Technology Pty Limited [2003] FCA 50 CONTRACT - Government procurement - outsourced contract for provision of a secure communications network for Department of Foreign Affairs and Trade - back-to-back IT contracts - claims and cross-claims of breach of contract or repudiation by subcontractor, head contractor and customer. CONTRACT - Termination for breach - non-provision by customer of boundary security devices - termination provision invoked - customer (head contractor) defences of contract variation, affirmation by election, estoppel and waiver. CONTRACT - Variation - oral contract - effect of oral contract - variation or discharge - formation of an oral contract in relational contract settings - difficulties with traditional analysis. CONTRACT - Affirmation by election - principles governing - significance of an optional contract termination procedure - continued performance consistent with the contract remaining on foot. CONTRACT - Estoppel - representations and conventional understanding that contract had been varied to remove the obligations alleged to have been breached - reliance. CONTRACT - Express provision for termination - construction - "failure of performance" - interpretation that accords with business commonsense. CONTRACT - Damages after termination for breach - losing contract - quantum meruit claim - unjust enrichment and contention that no benefit received from subcontractors performance - valuation of services. CONTRACT - Financial Securities - form of security prescribed by contract - payable on demand - provision governing call on securities - demand made for payment - call made on an erroneous ground. CONTRACT - Entire obligation - recovery of milestone payments made in advance - principles to be applied in construction of progress payment provisions. CONTRACT - Termination of a Standing Offer to sub-contractor to be a member of a panel having the opportunity to participate in tenders to Department of Defence - incorrect termination under the Agreement - efficacy of later reliance on a "termination for convenience" provision to justify termination. CONTRACT - Repudiation - subcontractor's purported termination for breach repudiatory - improvident contract - acceptance. CONTRACT - Duty of good faith and fair dealing - exercise of a power to terminate governed by. CONTRACT - Damages - back-to-back contracts - Hadley v Baxendale - head contractor performing work "from scratch" that the subcontractor was obliged to perform - recoverable heads of damages. CONTRACT - Damages - effect of subsequent agreement between customer and head contractor varying the original head contract. CONTRACT - Damages - repudiation by subcontractor - claim for loss of benefit of head contract - actual costs incurred - saved costs of performance - anticipated profits. CONTRACT - Damages - head contractor's costs of performing the work the subcontractor failed to do - claim for loss of return on labour and resources that had to be diverted to this use - whether a recoverable head of damages - proof of loss - applicable principles - claim for unprovided for overhead costs - whether a recoverable head of damages - proof of loss - applicable principles - dispute management costs - proof of loss - applicable principles - loss of use of money - weighted average cost of capital - proof of loss. CONTRACT - Performance Guarantee by third party - subcontractor's parent company - conditional performance guarantee coupled with an indemnity for "costs and expenses" - construction - scope of conditional guarantee - scope of indemnity - "costs and expenses directly incurred". CONTRACT - Claim by head contractor against Commonwealth mirroring claims against it by the subcontractor - independent claims as well of breach of contract arising from alleged decisions taken, misrepresentations and non-disclosure - failure by the Commonwealth to disclose its actual intentions in relation to provision of boundary security devices. TRADE PRACTICES ACT - Claim against the Commonwealth - denial that it was "carrying on a business" - significance of evidence of business activity - DFAT's purposes in acquiring a secure communication system and its associated intellectual property rights. CONTRACT - Delay claims - claim by Commonwealth for losses suffered in consequence of delayed performance by head contractor - effect on delay damages of later variation agreement. CONTRACT - Delay claims - heads of claim - additional project management costs incurred - extent to which, if at al, costs attributable to the breach - provision by Commonwealth of accommodation and facilities for an extended time in Commonwealth buildings - whether an actual loss - applicable principles - quantification of loss - use of a default measure. 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588 referred to Australian Guarantee Corporation Ltd v Balding (1930) 43 CLR 140 referred to Modern Building Wales Ltd v Lemmer and Trinidad Co Ltd [1975] 1 WLR 1281 referred to Byrne v Australian Airlines Ltd (1995) 185 CLR 410 applied Yau's Entertainment Pty Ltd v Asia Television Ltd [2002] FCA 338 (Full Court) applied Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601 referred to Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 referred to Spunwill Pty Ltd v BAB Pty Ltd (1994) 36 NSWLR 290 referred to Sargent v ASL Developments Ltd (1974) 131 CLR 634 applied Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26 applied Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyds L Rep 391 referred to Khoury v Government Insurance Office (NSW) (1984) 165 CLR 622 referred to Champtaloup v Thomas [1976] 2 NSWLR 264 referred to Majik Markets Pty Ltd v S & M Motor Repairs Pty Ltd (No 1) (1987) 10 NSWLR 49 referred to Cities Service Helix Inc v The United States 543 F 2d 1306 (1976) referred to Tropical Traders Ltd v Goonan (1964) 111 CLR 41 applied United Australia Ltd v Barclays Bank Ltd [1941] AC 1 referred to Larratt v Bankers and Traders' Insurance Co Ltd (1941) 41 SR (NSW) 215 referred to Petrie v Dwyer (1954) 91 CLR 99 referred to Davenport v R (1877) 3 App Cas 115 referred to Haynes v Hirst (1927) 27 SR (NSW) 480 referred to Central Estates (Belgravia) Ltd v Woolgar (No 2) [1972] 1 WLR 1048 referred to Foran v Wight (1989) 168 CLR 385 referred to Ogle v Comboyuro Investments Pty Ltd (1976) 136 CLR 444 referred to Carr v J A Berriman Pty Ltd (1953) 89 CLR 327 referred to Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 applied Johnson v Agnew [1980] AC 367 referred to Sibbles v Highfern Pty Ltd (1987) 164 CLR 214 referred to Thompson v Palmer (1933) 49 CLR 507 applied Government Employees Superannuation Board v Martin (1997) 19 WAR 224 referred to Giumelli v Giumelli (1999) 196 CLR 101 referred to Commonwealth of Australia v Verwayen (1990) 170 CLR 394 referred to Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 applied National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548n referred to Elsea Holdings Ltd v Butts (1986) 6 NSWLR 175 referred to Riseda Nominees Pty Ltd v St Vincent's Hospital (Melbourne) Ltd [1998] 2 VR 70 referred to Legione v Hateley 152 CLR 406 referred to Grundt v Great Boulder Pty Gold Mines Ltd (1937) 59 CLR 641 applied Low v Bouverie [1891] 3 Ch 82 referred to Silovi Pty Ltd v Barbaro (1988) 13 NSWLR 466 referred to Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 referred to Mortgage Acceptance Nominees Ltd v Australian Thoroughbred Finance Pty Ltd (1996) 69 SASR 302 referred to Austral Standard Cables Pty Ltd v Walker Nominees Pty Ltd (1992) 26 NSWLR 524 referred to Mackay v Dick (1881) 6 App Cas 251 referred to Electronic Industries Ltd v David Jones Ltd (1954) 91 CLR 288 referred to Big River Timbers Pty Ltd v Stewart (1999) 9 BPR 16,605 referred to Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 referred to Hide and Skin Trading Pty Ltd v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 referred to Minchillo v Ford Motor Company of Australia Ltd [1995] 2 VR 594 referred to Mitsui Construction Co Ltd v Attorney-General of Hong Kong (1986) 33 BLR 1 referred to J Kitchen & Sons Pty Ltd v Stewart's Cash and Carry Stores (1942) 66 CLR 116 applied Moschi v Lep Air Services Ltd [1973] AC 331 referred to Heyman v Darwins, Ltd [1942] AC 356 referred to Byrnes v Jokona Pty Ltd [2002] FCA 41 referred to Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 applied Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 applied Honner v Ashton (1979) 1 BPR 9478 referred to Ross T Smyth & Co Ltd v TD Bailey & Son [1940] 3 All ER 60 referred to Schenker & Co (Aust) Pty Ltd v Maplas Equipment 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Brenner v First Artists' Management Pty Ltd [1993] 2 VR 221 referred to Slowey v Lodder (1901) 20 NZLR 321 referred to Lodder v Slowey [1904] AC 442 referred to Chan v Cresdon Pty Ltd (1989) 168 CLR 242 referred to Reed Construction Services Pty Ltd v Kheng Seng (Australia) Pty Ltd (1998) 15 BCL 158 referred to Steele v Tardiani (1946) 72 CLR 386 referred to Hoenig v Isaacs [1952] 2 All ER 176 referred to Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124 referred to Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 referred to Walsh v Kinnear (1876) SCR(NSW) 434 referred to Pickering v Ilfracombe Railway Co (1868) LR 3CP 235 referred to McLachlan v Nourse [1928] SASR 230 referred to Markham v Bernales (1906) 8 WAR 208 referred to The Tergeste [1903] P 26 referred to Edward Owen Engineering Ltd v Barclays Bank International Ltd [1978] QB 159 referred to Wood Hall Ltd v Pipeline Authority (1979) 141 CLR 443 referred to Hortico (Australia) Pty Ltd v Energy 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Distributors Pty Ltd v Australia and New Zealand Banking Group Ltd (2000) 74 ALJR 791 referred to McMahon Constructions Pty Ltd v Crestwood Estates [1971] WAR 162 referred to Shevill v Builders Licensing Board (1982) 149 CLR 620 applied Laurinda Pty Ltd v Capalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623 applied Satellite Estate Pty Ltd v Jaquet (1968) 71 SR(NSW) 126 referred to DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423 referred to Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 referred to Summers v The Commonwealth (1918) 25 CLR 144 referred to Castlemaine Tooheys Ltd v Carlton & United Breweries Ltd (1987) 10 NSWLR 468 referred to Etna v Arif [1999] 2 VR 353 referred to Alcatel Australia Ltd v Scarcella (1988) 44 NSWLR 349 referred to Gary Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd (1999) ATPR 41-703 referred to Central Exchange Ltd v Anaconda Nickel Ltd (2001) 24 WAR 382 referred to Carmichael v Adirondack Bottled 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[2002] FCA 338
(1941) 65 CLR 221
(1957) 98 CLR 93
(1986) 162 CLR 221
(1906) 4 CLR 347
(1981) 36 ALR 567
(1990) 20 NSWLR 251
(2002) 187 ALR 92
(2001) 53 NSWLR 153
(2000) 172 ALR 346
(1977) 180 CLR 266
(1990) 102 FLR 240
(1988) 18 NSWLR 540
(1929) 43 CLR 310
(1997) 76 FCR 151
(2000) 177 ALR 611
(1998) 43 NSWLR 104
(1930) 43 CLR 140
(1995) 185 CLR 410
(1982) 149 CLR 337
(1994) 36 NSWLR 290
(1974) 131 CLR 634
(1993) 182 CLR 26
(1984) 165 CLR 622
(1987) 10 NSWLR 49
(1964) 111 CLR 41
(1954) 91 CLR 99
(1989) 168 CLR 385
(1976) 136 CLR 444
(1953) 89 CLR 327
(1940) 64 CLR 221
(1987) 164 CLR 214
(1933) 49 CLR 507
(1997) 19 WAR 224
(1999) 196 CLR 101
(1990) 170 CLR 394
(1988) 164 CLR 387
(1986) 6 NSWLR 175
(1937) 59 CLR 641
(1988) 13 NSWLR 466
(1989) 16 NSWLR 582
(1996) 69 SASR 302
(1992) 26 NSWLR 524
(1954) 91 CLR 288
(1990) 20 NSWLR 310
(1942) 66 CLR 116
(1987) 162 CLR 549
(1985) 157 CLR 17
(1992) 26 NSWLR 234
(1991) 174 CLR 64
(1933) 48 CLR 457
(1936) 54 CLR 361
(1993) 176 CLR 344
(2001) 185 ALR 335
(1994) 182 CLR 51
(1989) 168 CLR 242
(1946) 72 CLR 386
(1906) 8 WAR 208
(1979) 141 CLR 443
(1985) 1 NSWLR 545
(1978) 141 CLR 335
(1931) 45 CLR 359
(1961) 107 CLR 466
(2000) 176 ALR 693
(2000) 74 ALJR 791
(1982) 149 CLR 620
(1989) 166 CLR 623
(1978) 138 CLR 423
(1918) 25 CLR 144
(1987) 10 NSWLR 468
(1988) 44 NSWLR 349
(2001) 24 WAR 382
(2001) 184 ALR 481
(1972) 127 CLR 454
(1988) 166 CLR 351
(1963) 180 CLR 130
(1998) 44 NSWLR 1
(1995) 16 WAR 277
(1954) 90 CLR 613
(1988) 166 CLR 245
(1947) 74 CLR 127
(1994) 179 CLR 332
(1989) 171 CLR 125
(1970) 16 FLR 437
(1995) 32 IPR 573
(1993) 179 CLR 101
(1999) 162 ALR 505
(1956) 94 CLR 470
(1975) 10 SASR 76
(1984) 153 CLR 491
(2000) 104 FCR 448
(1997) 77 FCR 337
(1990) 60 SASR 120
(1993) 178 CLR 379
(1987) 162 CLR 221
(1991) 105 FLR 169
(1997) 45 NSWLR 624
(1990) 171 CLR 125
(1994) 179 CLR 101
(1992) 60 SASR 120