Howtrac Rentals Pty Ltd v Thiess Contractors

Supreme Court of Victoria|2000-12-21|Before: Gillard J

CONTRACT FOR PLANT HIRE - composition of contract - construction - entitlement to stand-by payment - counterclaim based on implied terms - implied terms of co-operation and acting in good faith do not oblige a party to agree to a variation of the agreement - counterclaim dismissed.

This is a proceeding instituted by writ in which the plaintiff seeks monies due under an agreement for the hire of equipment and provision of services and the defendant counterclaims damages for breach of contract.

The plaintiff, Howtrac Rentals Pty Ltd ("Howtrac") is a company which operates an earthmoving equipment hire business providing a range of earthmoving equipment. It operates from premises in Somerville, Victoria. It was formed in 1996 and is owned and controlled by Geoffrey Noel Howard ("Mr Howard").

By training Mr Howard is a diesel engine mechanic who was employed by Caterpillar, the well-known manufacturer of large equipment, where he was trained for management roles. He was employed in various positions eventually being promoted to the position of International Used Equipment Manager with Williams Adams Pty Ltd, a Caterpillar dealer. In 1994 he commenced his own business and formed the plaintiff in 1996.

The defendant, Thiess Contractors (NZ) Limited ("Thiess") is and was at all material times a company incorporated in New Zealand and carrying on business as a construction contractor. It is part of the Thiess construction business located in Brisbane. It has an office in Melbourne. The parent company conducts the largest construction business in Australia.

An Australia company Thiess Contractors Pty Ltd acted as the authorised agent of the defendant and the reference to "Thiess" hereafter includes the Australian company.

The basic facts which led to the dispute between the parties can be briefly stated.

In 1997, Thiess, entered into a contract with the Electricity Corporation of New Zealand ("ECNZ") to perform works at the Matahina Dam in the northern island of New Zealand. The works were to strengthen the Dam and involved removing material and replacing it. It needed heavy earthmoving equipment in order to perform the works.

From 3 July 1997 until 21 August 1997, Howtrac and Thiess negotiated the terms of a contract whereby Howtrac hired six-773B dump trucks to Thiess to be used at the Dam site.

A 733B dump truck is manufactured by Caterpillar and is a very large truck with a tray dump bin capable of carrying between 45.4 to 52.6 metric tonnes depending on the tyres and site conditions.

The parties finalised the contract on or about 21 August 1997.

During September and early October 1997, six trucks were delivered to the site.

Thereafter Thiess used the trucks in performance of their construction contract and on or about 20 October 1998 the contract between Howtrac and Thiess was terminated by mutual agreement. By that date there was no further requirement for the trucks.

It was a term of the hire agreement that Thiess would pay the plaintiff hire charges.

During the course of the job Howtrac forwarded accounts monthly which were paid.

On 19 November 1998 Howtrac submitted its final invoice to Thiess in Melbourne. The invoice was in the form of a letter together with supporting documents which set out in some detail the amounts claimed by Howtrac.

Howtrac claimed for hire charges, tyre wear damage, hungry boards discussions, damage and repairs, servicing costs, site mobilisation and miscellaneous costs which after taking into account what had been paid, left a net amount outstanding of A$1,090,136.53.

The letter of 19 November 1998 set out in some detail how each amount was made up. On 4 December 1998 Thiess sent a response to the final claim made by Howtrac which was to the effect that Howtrac was not entitled to what it sought. Thiess worked out its own calculation, criticised the performance of the contract by Howtrac and ended by saying that Thiess had shown remarkable restraint "in choosing not to pursue Howtrac for the full impact of its failure to preform (sic) in accordance with the contract we cite" and thereafter a number of criticisms were made.

The letter concluded by stating that the amount that was outstanding was $236,026 and stated as follows -

"We look forward to your early acceptance of the above to enable a final progress payment to be made."

Thiess made it quite clear that it would not pay the amount, it admitted it owed, unless it was in accepted full and final settlement of all claims.

Howtrac refused this demand and the parties were in dispute.

The real area of dispute at that stage concerned the claim by Howtrac for standby time. Thiess refused to pay for standby time.

Twenty days later Howtrac issued its writ in this court.

The plaintiff and the defendant admit there was a contract of hire between them. There are disputes as to what documents constituted the contract and whether the contract was partly oral and secondly, what the contract meant.

The plaintiff alleges that it was entitled to be paid the hire charges on a certain basis, together with other amounts which were due and owing pursuant to the contract or the contract as varied during performance. The evidence revealed that from time to time further discussions took place in relation to certain matters and the parties agreed that the varied position was to apply between them.

Howtrac's claims are for monies due under the contract between the parties. The claims according to the particulars of loss and damage are:

After deducting and adding certain sums by reason of New Zealand Revenue laws the total claimed was $1,055,786.41.

The real dispute between the parties concerns the hire charges which include a large sum for standby, that is, when a truck was available during a shift but not used by Thiess.

Items (v), (vi) and (vii) are not in dispute and there is no issue between the parties that the Howtrac is entitled to be paid those sums. The amounts in dispute in items (ii), (iii) and (iv) are small in comparison with the total claim and despite pressure from the Bench to split the difference, the parties have steadfastly soldiered on. The small amounts in dispute have been substantially increased by the legal costs incurred in contesting them.

In its original defence, Thiess counterclaimed four separate claims.

In a further amended defence and counterclaim filed in January 2000 Thiess confined its counterclaim to one claim and this concerned the hungry boards issue.

It is not surprising the other three claims were dropped. They were baseless. The fact that they were raised reflects on the two men at Thiess who were involved in the performance of the contract and who gave instructions for the litigation, Mr Sparkman, General Manager, Victoria and Mr Prater, Project Manager in New Zealand.

A hungry board is a steel panel some 15 millimetres thick which is placed on the sides of the dump body tray bin which contains the rock fill to increase the volume that can be carried by the truck. They run the length of the tray and are from 150mm to 420mm high.

If the sides are raised then the hirer would be able to carry more rock fill per hour, thereby reducing the time for the job and hence have to pay less hire. It clearly would have an economic impact not only on Thiess but also Howtrac if the hungry boards had have been fitted. Howtrac maintained throughout that its refusal to allow the installation was not influenced by economic factors. Its main concern was in respect of the effect on its insurance cover if the trucks were modified.

At this point it is important to note that the trucks which were supplied had a carrying capacity of 45.4 metric tonnes. The trucks can carry up to of 52.6 metric tonnes but in order to do so it is necessary to fit bigger, larger and more expensive tyres on the dumpmaster. Also it is necessary to take account of the site conditions before fitting the larger and very expensive tyres. This is made quite clear by the specification brochure concerning the Caterpillar 773B truck.

Very early in the performance of the contract Thiess informed Howtrac that it wished to fit hungry boards to the trucks to enable them to carry more rock fill. Discussions took place thereafter but no agreement was reached in respect to the installation of the hungry boards.

Thiess' counterclaims that there was an implied term of the agreement, that hungry boards would be fitted to each dump truck in order to meet its pay load capacity, and that by refusing permission to Thiess to modify the trucks, Howtrac was in breach of the contract and as a result Thiess suffered loss and damage. Other implied terms are pleaded and relied upon to the effect that if Howtrac had complied with its obligations under the contract it would have agreed to the fitting of the hungry boards.

According to the amended defence Thiess counterclaims the sum of A$477,298.

The pleadings and rival contentions between the parties raise the following issues for consideration and determination:

(i) What comprised the contract of hire between the parties?

(ii) What were the terms of the contract concerning -

(a) the hire rates to be paid by Thiess to Howtrac;

(b) provision of tyres, tyre damage and truck repairs and responsibility for same.

(iii) Were there implied terms of the contract as alleged by Thiess to the effect -

(a) that each party would do all things as were necessary on its part to enable the other party to have the benefit of the agreement;

(b) that each party would comply with reasonable requests made by the other party;

(c) that each party was under a duty to act reasonably and in good faith in responding to requests made by the other party;

(d) that hungry boards would be fitted to each Cat 773B Dump Truck as required in order to meet its payload capacity?

(iv) What amount is due to Howtrac under the contract?

(v) If there were implied terms to the effect alleged by Thiess, did Howtrac breach any and which of the terms?

(vi) If Howtrac did breach any implied term did Thiess suffer any damage and if so in what amount?

Evidence

The trial was conducted by witnesses giving their evidence-in-chief by witness statements. A number of witnesses were called by both parties.

It is necessary for the court to briefly comment on the credibility of a number of witnesses.

The first witness was Mr Geoffrey Howard. Mr Howard is a middle aged man who developed his own business in 1994 and frankly admitted that contractual matters, office work and formal documents were not his strong point. Early in his negotiations with Thiess he engaged a Mr Bruce Michell who is a consulting engineer to assist him with the negotiations and the administration of the contract. Mr Michell has continued to assist Mr Howard ever since.

Many letters which were sent by Mr Howard were in fact drafted by Mr Michell.

In my opinion Mr Howard is an honest man who as a witness was doing his best to honestly tell the court the facts. Like many witnesses he demonstrated at times an unreliable memory and uncertainty as to certain matters but nevertheless overall I formed the opinion that he was an honest and basically an accurate and reliable witness.

Mr Michell is an experienced, intelligent engineer who has a very good command of the basic principles of contract. Mr Howard was very wise to engage him not only to finalise the contract between the parties but also to assist him in administering the contract. In my opinion he could more than hold his own in discussions with the very experienced construction men employed by Thiess.

In giving evidence I formed the opinion that he was intelligent, had a very good understanding of the terms of the contract and the performance of same, and was an honest and reliable witness. He was well aware of the issues in the case and was very careful in giving his evidence.

The two main witnesses called by Thiess were Gregory Bernard Sparkman and Mark Andrew Prater.

Mr Sparkman is a civil engineer, who was at all relevant times the civil/mining manager for Victoria, Tasmania and South Australia for Thiess Contractors Pty Ltd, the parent company of the defendant. He had been with Thiess since May 1997. His position involved management responsibility for the delivery of projects and the New Zealand project was one of those over which he had a responsibility.

He is a very experienced man in the field of construction and civil works industry and in the last 15 years has occupied senior project management positions with the Citylink project and Leighton Contractors.

He was involved in the early negotiations with Mr Howard which he then passed on to Mr Prater who joined Thiess on or about 7 August 1997.

Mr Mark Prater is also a qualified civil engineer and has been engaged in civil engineering construction for the last ten years. He has also had experience with Leighton Contractors and was offered a job with Thiess through Mr Sparkman. He and Mr Sparkman had worked together before.

He was employed to be project manager for the Thiess Matahina dam project in New Zealand.

Soon after he commenced employment on 7 August 1997 he attended a project managers' meeting during which Mr Sparkman identified to him a number of issues concerned with the project that had to be progressed. One of the issues was the contractual negotiations with Howtrac.

Both men in evidence presented as persons who appreciated that they were employed by the biggest construction company in Australia. I formed the conclusion that they were hard headed businessmen who were very aware of the importance of making a profit out of a project and using pressure tactics to obtain their way.

The most important part of the evidence of Mr Sparkman concerned alleged conversations with Mr Howard concerning the issue of the payment of hiring costs for standby. This is the big issue between the parties concerning the claim by Howtrac for its hire costs.

In giving the evidence Mr Sparkman relied upon his memory. He had no note of the discussions. There was no letter which was written confirming the discussions which is inconsistent with the conduct of the parties who did adopt the pattern of putting most things in writing. His first witness statement was contrary to his amended witness statement in respect to the alleged conversations. He carried some responsibility for a number of claims made by Thiess which had no substance whatsoever. They were put forward in the defence and affidavits one of which was sworn by Mr Sparkman in support of Thiess' opposition to the claim for summary judgment. Thiess finally abandoned three out of the four claims.

In my opinion Mr Sparkman was very aware that if Thiess failed in this proceeding in its opposition to the claims made by Howtrac for standby here that that would reflect upon his conduct in negotiating the contract with Thiess. I formed the opinion that he was an unsatisfactory witness whose credibility was suspect, and his evidence has to be scrutinised extremely carefully.

Mr Prater falls into much the same category. Whilst denying to Howtrac any entitlement to payment for standby time, the Thiess New Zealand company was making a claim on the proprietor, ECNZ, in which Thiess claimed standby time which it alleged it had paid to Howtrac because of the variation in the head contract, with ECNZ. The claim was subsequently paid. This fact emerged in the course of discovery in the present proceeding. Arguably at the time the claim was made, it was fraudulent. Mr Prater was also responsible for giving instructions for the counterclaims which were dropped and he also swore an affidavit in opposition to the application for summary judgment in which he swore that the claims were proper. He was very aware of the issues in the case. He appreciated that if Howtrac succeeded in its claim for standby time he would be the person at Thiess held responsible for the contractual terms. The attitude of Thiess is that it never pays for standby time. If Howtrac succeeds he will be the one held responsible. I was not impressed by his evidence or his attitude.

In my opinion his evidence also has to be scrutinised very carefully before acceptance.

Many of the facts set out hereinafter are not in dispute. It will be necessary in considering the issues to further consider in some detail some of the factual matters.

Mr Howard and Howtrac had supplied vehicles for works which were carried out by three substantial companies including Thiess in 1996-1997. However, he did not know Messrs Sparkman and Prater prior to negotiations commencing in July 1997.

On 3 July 1997 Mr Greg Sparkman on behalf of Thiess in Melbourne sent a facsimile to Mr Howard enquiring as to the availability of plant which was required to perform certain works. Mr Sparkman requested Mr Howard to ring and discuss the matters with him.

The following day Mr Howard spoke to Mr Sparkman who wished to know what equipment Howtrac could supply and what servicing and workshop facilities it had to participate in the Dam project. Mr Howard responded by a letter on 8 July 1997 in which he indicated the availability of certain plant and equipment and emphasised in the letter that there were "quite a few legal and contractual issues that we need to put on paper, but at this stage we hope this gives you a starting point".

Messrs Howard and Sparkman met on 1 August 1997 and Mr Howard was told that Thiess required six trucks not four and was asked how quickly he could get six trucks to New Zealand. He said that he had access to four trucks but was concerned whether he could get two more.

Mr Sparkman gave evidence that some time between 1 and 6 August, either at a meeting on 1 August 1997 or subsequently during a telephone conversation or meeting on 4, 5 or 6 August 1997 he had discussions with Mr Howard. His version must be contrasted with what was alleged in the amended defence filed 17 January 2000 in which it was asserted that some time between 3 and 8 July and at a meeting on 1 August 1997 certain discussions took place. In addition in his first witness statement the dates of the alleged discussions occurred in a different time frame. Mr Howard denies these conversations. I accept the version of Mr Howard. I accept that there was no discussion of the duration of the project or the minimum hours that could be worked up to 4 August 1997. There was no discussion about the operating or the time or duration of the project up to that date. There was no discussion concerning minimum monthly cashflow, nor was there any discussion about the circumstances in which standby hours would be paid.

I accept Mr Howard when he said that the conversations with Mr Sparkman were restricted to the matters confirmed in correspondence between the parties.

On 4 August 1997 Mr Sparkman sent a facsimile which, inter alia, raised the question of availability of six trucks, shipping dates and the question of payment. On the same day Mr Howard sent a facsimile to Mr Sparkman stating, inter alia, that he could supply six dump trucks at A$95 per hour per unit and set out in some detail various conditions which he required.

By this time Mr Howard had engaged Mr Bruce Michell the consulting engineer to assist him with negotiating the contract. The facsimile sent on 4 August 1997 by Howtrac was in fact drafted by Mr Michell.

In a conversation held on 6 August 1997 Mr Howard expressed concern that two of the six trucks that he hoped to have, had been sold and that he had to organise shipping of the last four trucks as soon as possible. Mr Sparkman said that Thiess was in the process of putting forward an order so that something could be done.

On 6 August 1997 Thiess sent a facsimile which set out what it was prepared to agree to, including terms relating to hours of operation, rates and payment.

Howtrac followed this up on 6 August 1997 with a facsimile in which some of the matters put by Thiess, were, agreed and other matters were raised for negotiation.

The negotiations continued with Thiess sending a facsimile on 7 August 1997 in which Mr Sparkman concluded -

"Geoff, I hope this can conclude a hire agreement between the parties."

On the same day Howtrac sent a facsimile which indicated that it agreed in principle but there were certain matters that still required clarification. On 8 August 1997 Howtrac sent a facsimile in which it was stated that it had accepted the payment terms and methodology and concluded that it believed the matters raised "in the various correspondences are resolved and agreed" but it was noted that there had to be a site inspection prior to finalisation of the agreement.

By 9 August 1997 Mr Prater was in charge of negotiating the contract on behalf of Thiess.

On 11 August 1997 Thiess forwarded a facsimile to Mr Howard indicating agreement in relation to some matters but not other matters and in handwriting Mr Mark Prater wrote -

"Geoff, As discussed formal plant hire documents are currently being typed up. Will be faxed to you later this afternoon. The plant hire order for this work will be #83301 and the supply of the trucks is as per discussions between Greg Sparkman and yourself and outlined above."

Thiess forwarded a plant hire order No. 83301 dated 11 August 1999 which was completed in hand and had attached to it standard conditions of hire orders, conditions of hire-external equipment both of which were signed by Mark Prater, and a document containing special conditions.

The following day Mr Howard went to New Zealand to inspect the works and on the 13 August he toured around the works. He noted that the site was in the early stages of establishment.

Upon his return Mr Howard forwarded a letter dated 19 August 1997 which set out the terms and conditions upon which Howtrac was prepared to agree and in that document incorporated part of the conditions of hire contained in the plant hire order number. The letter was drafted by Mr Michell.

"We trust the foregoing and attached schedule is to your satisfaction. Await your early reply in order that current shipping times can be met."

The attached schedule contained what were described as "SPECIAL CONDITIONS".

The letter of 19 August 1997 from Howtrac, contained many terms which were different to the terms set out in the plant hire order forwarded by Thiess.

Included in the changes were the number of minimum guaranteed hours of hire which were expressed as "working hours aggregate", the period of hire, the payment of terms and the cost of transport from Auckland to the site and back to Auckland after the job was completed.

On any view the facsimile of 19 August 1997 constituted a counter offer by Howtrac and this was not disputed between the parties.

On that same day Mr Prater sent back the facsimile and the attached special conditions to Mr Howard, containing handwritten amendments made by him.

Later that day Mr Howard sent a facsimile to Mr Prater in which responses were made to the comments marked by Mr Prater on the earlier facsimile and concluded by asking for confirmation.

Two days later on 21 August 1997 Mr Prater sent a handwritten facsimile which stated -

"Further to our discussion of 19/8/97 and 21/8/97 we confirm our agreement with Items 1 to 5 of your facsimile of 19/8/97."

On 20 August 1997 Mr Howard flew to Japan to finalise the purchase and shipping of four secondhand dump trucks. Mr Howard obtained two trucks in Australia.

The six trucks were given numbers by Thiess. Trucks 1 and 3 were delivered on 9 and 10 September 1997 respectively, trucks 5 and 6 were delivered on 27 and 29 September respectively, and trucks 4 and 2 were delivered on 1 and 2 October 1997 respectively. This was in accordance with the contract documents.

Howtrac appointed Mr Glen Cox, a diesel mechanic employed by it as its mechanical supervisor on site to oversee the servicing and maintenance of the trucks during the period of the hire agreement. In addition, Mr Cox performed an important function on behalf of Howtrac, namely, recording the hours when each truck was operating and the hours when it was not operating even though available i.e. standby. The hours were recorded from the first shift when the trucks were used, namely, 15 September 1997 on a form headed "MACHINE HOURS" which had a column marked "DOWN TIME". On 18 September 1997 he recorded eight hours downtime and noted the cause was lack of operator to drive the truck.

Copies of the Machine Hours forms when completed were given to Thiess. These forms were completed up to 9 February 1998. In the meantime Thiess provided another form from 10 November 1997 which was also completed by Mr Cox and handed to Thiess. This form also contained a column for "standby". This form was on occasions signed by a Thiess representative.

Forms were filled out during the whole job and handed to Thiess. Mr Dirk Retief in January 1998 was employed by Howtrac as its Project Manager on site and one of his functions was to record the hours of operation and standby on the Daily Truck Operating Hours Sheet.

The trucks were used on the construction site. In late August 1998 Howtrac was informed that there were only about three weeks of work involving the trucks and it was anticipated that the hire would cease some time in late September. In fact the agreement was terminated by the agreement of the parties on 20 October 1998 after the trucks were inspected by the parties and a tyre wear report was agreed to by the parties.

Going back in time, on 6 October 1997 Thiess wrote a letter to Howtrac in which it pointed out that

"The existing bodies on your trucks do not carry a full pay load on the above mentioned project. Modifications are being carried out to increase the capacity of your trucks. Your on site fitter has been advised of our intended works. We have attached drawings and calculations for your information."

The drawings were not included but were sent later. They set out what was involved in the installation of hungry boards.

The same day Mr Howard sent a facsimile to Mr Prater informing him -

"Please note, that no modifications are to be carried out to the trucks without written authorisation from myself."

Howtrac was concerned with the effect of any modifications concerning its insurance cover but in addition whether the modifications would cause damage to the trucks and result in excessive wear of the trucks including tyre wear.

During the course of the project many tyres were damaged due to the very rough terrain and working conditions and many tyres failed to provide 3,500 hours of use which was contemplated by the parties.

Each truck was valued at A$300,000 . If it was damaged and the insurance did not cover the loss, Howtrac could suffer a substantial financial loss.

In early November 1997 Mr Bruce Michell and Mr Howard travelled to the site in New Zealand in an attempt to sort out the matter of installation of hungry boards. On arrival it was observed that truck No. 6 already had hungry boards installed by Thiess without permission.

Later that day a meeting took place between Messrs Michell and Howard on behalf of Howtrac and Messrs Prater and Nicholson on behalf of Thiess. It was made quite clear by Mr Howard that Thiess had performed unauthorised modifications to the truck, that there was a concern about insurance cover and Mr Howard forbade Thiess to use any truck with hungry boards until the boards were removed. Mr Prater agreed that the hungry boards would be removed.

At that meeting Mr Howard was provided with a bundle of Thiess daily diary sheets. By Christmas 1997 Mr Howard was concerned about the issues that were being raised by Thiess in relation to a number of matters and he requested Mr Michell to take over the administration of the project on behalf of Howtrac on a day to day basis.

Mr Michell provided reports on the installation of hungry boards, discussions took place with insurance brokers engaged by Howtrac, correspondence was sent to and received back from Howtrac's insurers and by the end of March 1998 permission had not been given to install the boards.

The two main issues of concern for Howtrac were safety and insurance.

In April 1998 Mr Sparkman told Mr Howard at a meeting that Thiess would take over the insurance on the trucks and Sparkman provided copies of the Thiess proposed insurance policy for Howtrac to consider. This was passed on to the insurance brokers for Howtrac. On 20 April 1998 a meeting took place where various issues were raised and Mr Howard indicated that hungry boards could be installed, provided agreement was reached in relation to the mounting costs for tyres, damage repair and insurance issues.

On 1 May 1998 another meeting took place between Mr Sparkman and Messrs Michell and Howard concerning the hungry boards in which requests were made for Thiess to pay outstanding claims.

I accept the evidence of Mr Howard that Mr Sparkman replied that if Howtrac did not give Thiess authorisation he had no intention of resolving the remaining issues between the parties and that hungry boards would be fitted first and other issues sorted out later.

One of the matters that Mr Howard raised was the payment of $100,000 in relation to invoices not paid by Thiess. On 1 May 1998 he sent a facsimile to Mr Sparkman which said -

"If $100,000 payment is made today, then we have an agreement. Please leave a message with my office."

Nothing came of that meeting and no further discussion took place concerning the hungry boards. Thiess abandoned the proposal to fit hungry boards in May 1998. The insurance issue was never resolved to the satisfaction of the parties.

Hungry boards were not fitted to the Howtrac trucks after that meeting.

On 19 November 1998 Howtrac sent its final invoice which Thiess responded to by stating that it only owed a certain sum of money and that it would pay the sum in full and final settlement.

It will be necessary to further consider the facts in relation to the issues.

It is the submission of Howtrac that the agreement is wholly in writing and compromises the documents in Exhibit PL1, namely, that portion of plant hire order No. 83301 concerning the obligations of the owner specified in the Conditions of Hire, the plaintiff's facsimile dated 19 August 1997, Mr Prater's handwritten amendment to that facsimile of the same date, the facsimile from Howtrac also dated 19 August 1997 and the handwritten facsimile from Mr Prater dated 21 August 1997. It is the contention of Howtrac that the parties had entered into a binding and concluded contract by 21 August 1997.

Thiess for its part, submits that there were additional documents comprising the contract, namely, the documents in Exhibit DEF1 being the correspondence between the parties from 4 August 1997 to 11 August 1997.

In addition it is submitted on behalf of Thiess that there was an oral content of the agreement. Further it is contended that there were certain implied terms.

There is no doubt in my opinion that the parties had entered into a final, concluded and binding contract on 21 August 1997. That is clear from the wording of the documents which comprise Exhibit PL1. Further, the parties commenced performance of the contract very soon after that date.

Whether or not a binding concluded contract in law has come into existence is a question of fact. The plaintiff has the burden of persuading the court that agreement was reached with respect to essential terms to effect the commercial purpose and that the parties intended to be bound in law by the agreement.

In determining the question, the court considers all relevant facts which includes facts which occurred after the date of the alleged contract. See Hussey v Horne-Payne (1879) 4 App. Cas. 311, Howard Smith & Co Ltd v Varawa [1907] HCA 38; (1907) 5 CLR 68, and Toyota v Ken Morgan [1994] VicRp 55; (1994) 2 VR 106 at 134.

First, did the parties arrive at a consensus; secondly, if they did, was the consensus such that it was capable of forming a binding contract in the circumstances; and, finally, did the parties intend that the consensus at which they arrived should constitute a binding contract? See Air Great Lakes Pty Ltd v K.S. Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309 at 326.

As a general proposition the court is concerned with the objective manifestation of both the fact of agreement and intention to be bound. As a general rule it is not appropriate to look into the minds of the parties to seek what they actually intended.

In this proceeding the court is concerned with a bi-lateral contract. The evidence shows negotiation over a period of time, offer and counter offer and acceptance, and plainly an intention on both sides to "do business", that is, to bring into existence a contract binding in law.

The negotiations commenced in early July 1997 and continued right through to 21 August 1997. There was at least one face to face meeting between the negotiating parties, then Mr Howard and Mr Sparkman, and some discussions over the telephone but by and large the parties negotiated through correspondence.

In determining whether or not the parties had arrived at a final binding and concluded contract it is necessary to look at the whole of the correspondence in order to see whether they have reached that agreement.

In Hussey v Horne-Payne, supra, Lord Cairns said at p.316:

"Where you have to find your contract or your note or memorandum of the terms of the contract in letters you make take into consideration the whole of the correspondence which has passed. You must not at one particular time draw a line and say, 'We will look at the letters up to this point and find in them a contract or not, but we will look at nothing beyond'."

What the court is concerned to determine is whether there has been final agreement between the parties with respect to the essential terms to give effect to the commercial purpose, and an intention to be bound.

The evidence shows that on 11 August 1997 Mr Prater who had been given the responsibility of finalising the contract on behalf of Thiess with Howtrac, prepared and signed a Plant Hire Order form. It set out in some detail the terms of the proposed contract.

Prior to the preparation of this document, it had been made clear by Howtrac that no contract would be finalised until Mr Howard had visited the site in New Zealand. He travelled to New Zealand on 12 August 1997.

On 18 August 1997 Howtrac sent a facsimile letter to Thiess marked for the attention of Mr Prater which set out in some detail the terms and conditions "under which the hire arrangements will operate between Thiess and Howtrac." A comparison of that document with the Plant Hire Order form revealed a number of changed conditions to that which appeared in the Plant Hire Order form. Mr Prater accepted that there was a difference between the two documents. In my opinion the document of 19 August 1997 represented a counter-offer by Howtrac to Thiess and contained the terms upon which Howtrac was prepared to enter into a contract of hire.

That same day at about 1.49 p.m. Mr Prater faxed back to Howtrac a copy of their facsimile upon which he had made a number of handwritten comments. By so doing he was stating what Thiess' attitude was to the offer made by Howtrac and this document in itself represented another offer. On the same day Howtrac sent to Mr Prater a facsimile marked "urgent" in which it was noted that "We have reviewed your comments marked up on our letter and respond in order that they are noted".

Thereafter was written five paragraphs dealing with the matters raised by Mr Prater and the sixth paragraph was expressed as follows -

"In order that the time provisions of our offer can be maintained we will require your confirmation of the foregoing tonight. We are scheduled to leave for Japan early tomorrow and require that confirmation prior to departure."

On 21 August 1997 Mr Prater sent a handwritten facsimile to Mr Howard which provided -

"Further to our discussion of 19/8/97 and 21/8/97 we confirm our agreement with items 1 to 5 of your facsimile of 18/8/97. Regards, Mark Prater."

Mr Howard did travel to Japan and arranged for the acquisition of a number of trucks.

I am satisfied that as at 21 August 1997 the parties had entered into a final and binding concluded contract and intended to be bound in law.

Mr Collinson did raise the question whether two facsimiles which passed between the parties at the end of August 1997 formed part of the contract. In my opinion they did not. They were nothing more than clarification of an aspect of the contract to satisfy a query of Howtrac's financier.

In the facsimile of 19 August 1997 from Howtrac to Thiess, Howtrac accepted the terms noted in the attachment to the Plant Hire Order form under the heading "Obligation of Owner".

In my opinion subject to consideration and determination of the issues raised by Thiess, the contract was embodied in writing and constituted by the Howtrac facsimile of 19 August 1997 which incorporated portion of the conditions of hire found attached to the Plant Hire Order form, Mr Prater's handwritten amendments to that facsimile, Howtrac's facsimile of 19 August 1997 noting the comments made by Mr Prater, and Mr Prater's handwritten facsimile of 21 August 1997.

(i) the correspondence passing between the parties from 4 August 1997 up to and including the documents constituted by the Plant Hire Order form and attached documents also formed part of the written contract;

(ii) that there was an oral part of the contract constituted by alleged conversations between Messrs Sparkman and Howard between 1 - 6 August 1997;

(iii) that there were certain implied terms of the contract.

I will deal with the implied terms when considering the counterclaim of Thiess.

With respect to the first issue, the documents from 4 August 1996 up to 11 August 1997 contained a number of statements made by each party, and were negotiations. They did not constitute terms intended to have contractual effect. A close analysis of their contents shows representations being made by both sides which show their negotiating attitude which did not result in agreement between the parties or an intention to be bound.

The documents show the hopes, intentions and expectations of the parties and do reveal what the parties hoped to achieved. But in the end they are no more than negotiations. One can see by looking at the Plant Hire Order form that the parties had got very close to finalising an agreement. But they had not done so.

It is clear from the correspondence between the parties that it was their intention that the contract would be evidenced in writing and that is supported by the correspondence that passed between them on 19 August and 21 August.

In my opinion the documents relied upon by Thiess do not form part of the contract. That is not to say that they are irrelevant to the question of construction; they may be.

In its further amended defence delivered in June 2000, Thiess asserts in particulars concerning the contract the following -

"In so far as it is oral it is constituted by conversations between Geoff Howard of the plaintiff and Greg Sparkman of the defendant during July and August 1997 to the effect as alleged."

In paragraph five of the further amended statement of claim Howtrac sets out the terms of the agreement. In its further amended defence Thiess pleads to the terms set out and in paragraph 5(l) asserts that there were conversations in Melbourne which occurred between the dates of 3 and 8 July 1997 and the dates of 4 and 6 August 1997 and at a meeting on 1 August 1997 between Messrs Howard and Sparkman. The pleading goes on to set out the conversations.

The discussions are alleged to have discussed a number of matters and it is impossible from the pleading to determine the oral term of the contract.

In final submissions, Mr Collinson of counsel on behalf of Thiess was requested to state what the oral term or terms were that were agreed to by the parties during conversations had between Mr Sparkman and Mr Howard in early August 1997.

After submissions had concluded Mr Collinson forwarded to the court a written submission stating that the oral terms were as follows -

"(a) The contract for the project may be extended from 52 weeks to 60 weeks in duration but the minimum 21,000 working hours would still apply to the 60 week period;

(b) In order to protect Howtrac's monthly cashflow Thiess would pay a minimum monthly payment of 200 hours per month;

(c) If the working hours were less than 200 hours per month then the balance up to 200 hours per month would be paid at a standing charge of $60 per hour;

(d) If the working hours in any month were greater than 200, any standby hours previously paid to make up the minimum requirement for previous months would be deducted from the working hours in excess of 200 to calculate the payment for that month;

(e) The entitlement at the end of the hire period would be determined by reference to total working hours with a minimum of 21,000 working hours."

It is submitted that the discussions took place during the period from 1 August 1997, either at a meeting on 1 August or subsequently during telephone conversations or a meeting on 4, 5 or 6 August 1997.

Whether or not the parties have in the course of negotiations agreed to a term which was intended to be contractual depends upon proof of the agreement as to the term, and an intention by the parties objectively determined that the agreed term is to be a term of the contract which the parties expect, will be concluded. It cannot be a term if the subject matter is contained in a term of the written contract which is concluded at a later date.

An analysis of the written contractual documents reveals that "the matters covered by the alleged term partially derived from the Sparkman/Howard conversations in early August 1997 were agreed to in the contractual documents. Indeed in his submissions, Mr Collinson submits that the term relied upon "is the same as the term derived from," inter alia, the Plant Hire Order form, and the facsimile and copy facsimile dated 19 August 1997. If the matters were discussed during the period alleged they were part of the negotiations which were subsequently addressed in the contract.

But in any event I have already found that I prefer the version of Mr Howard of the conversations between he and Mr Sparkman. There is no evidence that the parties agreed to the alleged term and intended to be bound at such an early stage of the negotiations.

The conversations had between Messrs Howard and Sparkman were nothing more than negotiations representing the views, expectations and hopes of the parties but did not result in any agreement with respect to a term or an intention to be bound by that term if a contract later came into being.

Accordingly, in my opinion the contract is wholly in writing and constituted by the documents stated above.

The court's object in interpreting a contract is to determine the common intention of the parties.

It is trite law that the common intention is to be determined at the date the contract was concluded. That is 21 August 1997.

The primary source of the common intention is the words of the contract. They are to be considered in context after taking into account the whole document.

The words are to be given their normal every day meaning unless the words bear a special meaning because, they are technical or because of trade usage or custom or the admissible surrounding circumstances show that the parties used a word in a particular sense.

If the language used is clear and definite there is no necessity to resort to any aids to interpret the agreement. The clear language must be given effect to. But if the language is obscure, uncertain, ambiguous, or susceptible to more than one meaning then the court seeks to determine what the parties intended by resort to admissible evidence and aids to construction.

Sometimes linguistic mistakes are made. If it is clear the parties have failed to properly record their intention, then the latter must prevail over the language.

"On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said in Antaiso Compania Naviera S.A. v Salen Rederierna A.B. (1985) A.C. 191 at 201: 'if detailed semantic and syntactical analysis of words in a commercial context is going to lead to a conclusion that flouts business common sense, it must be made to yield to business commonsense'

per Lord Hoffman in I.C.S. Ltd v West Bromwich B.S. (1998) 1 WLR at p.913.

See also Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VicRp 74; (1990) VR 834 at 837, 840 and 848.

The court avoids a result which is unreasonable and absurd when viewed in a commercial setting. Clearly, parties do not intend an absurd or unjust result. See L. Schuler A.G. v Wickham Machine Tool Sales Ltd [1973] UKHL 2; (1974) AC 235 at pp.251, 255-6, 264 and 272.

But that is not to say the court has a licence to construe the words to achieve a result. Sometimes on a plain meaning of the words the meaning is clear but it is thought that the parties were unlikely to have had that result in mind.

The law is clear. Parties are bound by their contract whether they read it or not and whether they appreciated the significance of its terms. If a term had been drawn to their attention at the time and the likelihood is that the parties would have deleted a term but did not do so, in the absence of compelling evidence of error, the parties are bound.

The court's function is to read the words intelligently in the meaning the parties understood and give effect to them and only if the meaning of the words is open to reasonable doubt does the court consider the consequences. See Total Gas Marketing Ltd v Arco British Ltd (1998) 2 LL. Rep. 209 at 223.

But it is important to construe the words to give effect to what the parties meant.

"The meaning of words is a matter of dictionaries and grammars: the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean".

"Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract" - ibid at p.912.

The emphasis on giving effect to what the parties as commercial men intended to achieve is not new.

Lord Tomlin in Hillas & Co v Arcos Ltd [1932] UKHL 2; (1932) 38 Com. Cas. 23 at p.29 said -

"The problem for a court of construction must always be so to balance matters that, without the violation of essential principle, the dealings of men may as far as possible be treated as effective, and that the law may not incur the reproach of being the destroyer of bargains".

The dicta encapsulates the philosophy of law of contract: that the reasonable expectations of honest men should be protected.

Steyn L.J. summarised the theme as he called it in First Energy (UK) Ltd v Hungarian International Bank Ltd (1993) 2 LL. L. Rep. 194 at 196 when he said -

"A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or a principle of law. It is the objective which has been and still is the principal moulding force of our law of contract. It affords no licence to a judge to depart from binding precedent. On the other hand, if the prima facie solution to a problem runs counter to the reasonable expectations of honest men, this criterion sometimes requires a rigorous re-examination of the problem to ascertain whether the law does indeed compel demonstrable unfairness."

Lord Hoffman summarised the modern approach to interpretation of contracts in I.C.S. Ltd case supra at p.912 when he said after referring to the speeches of Lord Wilberforce in Prenn v Simmonds and Reardon Smith Line Ltd v Yjngvar Hansen-Tangen -

"The result has been subject to one important exception, to assimilate the way in which such documents are interpreted by judges to the common sense principles by which any serious utterance would be interpreted in ordinary life. Almost all the old intellectual baggage of 'legal' interpretation has been discarded."

The exception he was referring to is the situation when the parties have made an error in use of language.

In carrying out the task of construction the court is not confined to the words of the agreement. Gone are the days when the court construed a contract in a vacuum.

"The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, anti-literal tendencies for Lord Blackburn's well-known judgment in River Wear Commissioners v Adamson (1877) 2 App. Cas. 743 at 763, provides ample warrant for a liberal approach. We must, as he said, inquire beyond the language to see what the circumstances were with reference to which the words were used and the object, appearing from those circumstances which the person using them had in view." Per Lord Wilberforce in Prenn v Simmonds (1971) 1 WLR 1381 at 1383-4.

His Lordship, who wrote the leading speech, held that the evidence concerning the matrix of facts "should be restricted to evidence of the factual background known to the parties at or before the date of the contract, including evidence of the genesis and objectively the 'aim' of the transaction."

The resort to background circumstances and negotiations was discussed in the leading judgment of Mason, J in Codelfa Construction Pty Ltd v State Rail Authority of N.S.W. [1982] HCA 24; (1982) 149 CLR 337 at pp.347 et seq.

With respect to negotiations and surrounding circumstances, his Honour said this at p.352 -

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed. It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification." (Emphases added.)

At a glance

Court

Decision date

Before

Source

Judgment (500 paragraphs)

Parties

Cases Cited (15)