Macmahon Mining Services v Cobar Management

Judgment (ex tempore - revised 30 May 2014) 1HIS HONOUR: I am concerned today with an application by the plaintiff/cross-defendant (Macmahon) to dismiss summarily or to strike out certain claims made by the defendant/cross-claimant (Cobar). To give context to what follows, I set out paras 1 to 8, 10 and 11 of reasons that I gave on 25 March 2014 ([2014] NSWSC 502) in respect of Cobar's application to strike out one aspect only of Macmahon's claim against it: 1. On 14 October 2011, the plaintiff (Macmahon) as contractor and the defendant (Cobar) as principal made a written agreement under which Macmahon undertook to design and construct certain works for the development of Cobar's copper mine at Cobar in this State. 2. On 4 June 2013, Cobar wrote to Macmahon giving what it said was notice of termination of the contract. Cobar relied on a contractual provision, cl 22.3(a), which entitled it to terminate forthwith for breach if, in its opinion, the breach was material and incapable of remedy. Cobar relied also on the two following paragraphs of cl 22.3. One of those grounds related to asserted breach of Occupation Health and Safety obligations. The other related to other asserted material breaches which, in Cobar's opinion (said to have been reasonably formed), could not be rectified without themselves causing further material breaches. 3. Macmahon says that the termination was invalid, however, and that the letter of termination constituted a repudiation of the contract. On 19 June 2013 (presumably, having had an opportunity to consider its position), Macmahon notified Cobar that it accepted the repudiation as discharging the contract. 4. Macmahon sues for damages. One of the heads of damage claimed is described in the list statement as "loss of opportunity to earn profit". Macmahon says that, had the contract continued to completion, it would have made very substantial profits, and that the termination of the contract has denied it the opportunity to earn those profits. 5. Cobar moves for summary dismissal of the claim for loss of opportunity to earn profit. It relies on a particular clause, cl 18.5, of the contract. Relevant provisions of the contract 6. Before I turn to cl 18.5, I should note that the contract was somewhat unusual in its structure. The contract mechanism provided that the price payable by Cobar to Macmahon would be developed as work progressed, the work itself being done according to a schedule of rates. The intention was, in effect, that Macmahon's design and construct obligations would be done on a basis which, with some exceptions, guaranteed it a profitable outcome. All that appears from cl 2.2. Clause 2.1 describes the purpose of the clause itself, and cl 2.3 summarises the respective liabilities that the parties understood themselves to be undertaking. Although cl 2 was not intended to have legal effect, it is nonetheless of some importance, and I set it out: 2. Summary of Liability Principles 2.1 Purpose (a) The purpose of this clause 2 is to summarise the agreed principles of liability for the Principal and the Contractor. (b) The clause is not intended to have legal effect. The rights and obligations of the parties are as fully described in the other provisions of the Contract. 2.2 Background and intent (a) In view of the uncertainty of the design and construction requirements as at the date of the Contract it is not feasible for the Contractor to provide a fixed lump sum price as the basis for payment. (b) Accordingly the parties have agreed: (i) to build up the Contract Sum: (A) over the period up to Final Completion; and (B) by utilising a cost reimbursement mechanism which provides an incentive for cost control; and (ii) that the prices in the Schedule of Rates will contain lower margins than is commercially usual to reflect the lower risk profile to the Contractor. 2.3 Liability summary (a) Irrespective of whether a Defect is caused by the negligence of the Contractor, the cost of rectification will form part of the Actual Approved Cost. (b) Notwithstanding clause 2.3(a), where a Defect is caused by the negligence of the Contractor and the cost of rectifying the Defect exceeds $150,000, the cost of rectifying that Defect will form part of the Actual Approved Cost but will not form part of the Agreed Maximum Project Cost. For the avoidance of doubt, in all other cases the cost of rectifying a Defect will form part of both the Actual Approved Cost and the Agreed Maximum Project Cost. (c) The Contractor will use its best endeavours to procure warranties from suppliers in relation to Purchased Equipment, thereby giving the Principal a direct claim (based on the terms of the warranty) against the supplier. (d) The Contractor will indemnify the Principal for losses arising out of: (i) damage to property; (ii) injury; and (iii) infringement of intellectual property of third parties in circumstances, to the extent that such loss is caused by the Contractor's breach of this Contract. (e) No damage, liquidated or otherwise, are payable in respect of delay. Rather, if delay causes the Actual Approved Cost to exceed the Agreed Maximum Project Cost, the 50:50 share of cost overruns as provided for in clause 4 will apply. (f) Neither party is liable for indirect or consequential loss. (g) With certain exceptions, each party's total aggregate liability to the other party is limited to the Contract Sum. 7. There were provisions of the contract dealing with the work to be undertaken by Macmahon, the way in which the contract sum would be built up and the way in which payment would be claimed and made. For present purposes those provisions need not be set out. 8. Clause 18 is of key importance. The "Consequential Loss" exclusion, on which Cobar relies, is found therein. I set out cl 18: 18 Liability and indemnities 18.1 Indemnity The Contractor must indemnify the Principal against all costs, damage, expense, loss or liability of any nature suffered or incurred by the Principal as a result of the negligent performance of the Contractor's Activities or default under the Contract arising out of: (a) physical loss of damage to property of the Principal; (b) damage, expense, loss or liability in respect of loss of or damage to any other property (including any adjoining property); (c) damage, expense, loss or liability in respect of personal injury, disease, illness or death; (d) infringement of the Intellectual Property Rights of a third party; and (e) damage, expense, loss or liability of any nature that may be suffered or incurred by the Principal by reason of the failure of the Contractor to fulfil its obligations under this Contract, including claims made or brought under or in relation to this Contract, except to the extent that liability, loss or damage arises out of the negligent acts or omissions of the Principal, its employees, agents or other contractors. 18.2 Indemnities continuing Each indemnity in this Contract is a continuing obligation separate and independent from the Contractor's other obligations and survives termination of this Contract. 18.3 Payment All sums due pursuant to any indemnity given under this Contract must be paid without deduction on demand. 18.4 Overall limit of liability To the extent permissible at Law, each party's total aggregate liability to the other party (other than the Principal's liability to pay the Contract Sum, including in respect of any Change) under, arising out of or in connection with this contract, whether in contract (for breach, indemnity or otherwise), in restitution, in equity, under statute or in tort (for negligence or otherwise) is limited to an amount equivalent to the Contract Sum, except for liabilities: (a) for infringement of Intellectual Property Rights; (b) caused by wilful misconduct or fraudulent or criminal actions of either party; and (c) in respect of which either party is entitled to be indemnified and receives full payment under a contract of insurance (in which case, that party's liability is limited to the amount of that payment). 18.5 Consequential Loss Despite anything else in this contract, neither party will be liable to the other for any Consequential Loss. 18.6 Proportionate liability The parties agree that to the maximum extent permitted by the Civil Liability Act 2002 (NSW), this Contract operates to the exclusion of all provisions contained in Part 4 of the Civil Liability Act 2002 (NSW). ... 10. The expression "Consequential Loss", in cl 18.5, is a defined term (the use of initial capital letters signifies this). The definition is contained in cl 1.1, which, as usual, assigns meanings to defined terms "unless the contrary intention appears". The definition of Consequential Loss is: Consequential Loss means: (a) any special or indirect loss or damage; and (b) any loss or profits, loss or production, loss or revenue, loss of use, loss of contract, loss of goodwill, loss of opportunity or wasted overheads, whatsoever, whether direct or indirect. 11. In relation to the definition of Consequential Loss, it may be observed that where the word "or" appears first, secondly and thirdly in paragraph (b), it should be read as "of". To the extent that it is relevant, I would note that this does not appear to be the only example of minimally inadequate proof-reading in the document overall. I am not sure that the process of construction which involves reading the first three occurrences of "or" as "of" was contentious. 2Since the parties appeared to conduct today's debate on the basis that what I had said in my earlier reasons was either correct or, for present purposes, unchallenged (and I do not mean to record that any party has made a concession which it did not intend to make), I set out also what I said at paras 23 to 29 of those reasons: 23. The question of construction is one of considerable difficulty. On the one hand there is, as Mr Inatey submitted, the clear wording of cl 18.5. On the other hand there is, as Mr Corsaro submitted, a possibility that the right given to Macmahon, to be compensated for loss of profit in the event of a termination for convenience, might be circumvented by a wilful and knowingly unfounded termination (or purported termination) for breach in reliance on cl 22.3. That possibility could only be realised, as Mr Inatey submitted, if Macmahon relied on an asserted termination to bring the contract to an end. 24. It is necessary to pay close attention to the language of cl 18 and, in that connection, to the language of the definition of Consequential Loss. It is also necessary to observe that cl 2.3, although not having contractual effect, nonetheless sets out clearly in para (f) the intention that no party has any liability to the other for indirect or consequential loss. 25. When one looks at cl 18.4 one sees an overall limit of liability - to the equivalent value of the contract sum - with three stated exceptions. One of those stated exceptions (para (b)) includes wilful misconduct. 26. Clause 18.5 adds another limit of liability, by excluding any liability for consequential loss. Clause 18.5 applies, unlike cl 18.4, "[d]espite anything else in this contract," and cl 18.5, again unlike cl 18.4, does not include any exception for liabilities such as those arising from wilful misconduct. That could be seen to embody a deliberate drafting choice. 27. When one turns to the definition of Consequential Loss, para (b) makes it plain that any form of loss, whether direct or indirect, of the various kinds that are described, falls within the defined term. One of those categories of loss is "loss of contract". Although those words might appear to be somewhat obscure, it was common ground that they were intended to catch loss of the benefit both of the particular contract in which they appear - that is to say the contract between Cobar and Macmahon - and other, or third party, contracts, the benefit of which might be lost to one party as a result of some breach by the other of the parties' own contract. 28. I think that the concession, if that is what it is, was properly made. The expression "contract" seems to me to be a shorthand way of saying "benefit of a contract". Although it does not have an initial capital letter (and, thus, is not "this Contract", which is defined to be the agreement with which I am concerned), nonetheless, on the basis that the general includes the particular, I think that the expression "loss of [the benefit of a] contract" encompasses losses both under the particular contract and, as I have said, under other contracts that in some way may be affected by breach of the particular contract. 29. On that approach, the parties naturally must have taken into their consideration, when they made their contract, that the excluded Consequential Loss would include loss of the benefit of the very contract in which the provision excluding liability for consequential loss appears. Loss of the benefit of that contract would be, ordinarily, a consequence of accepted repudiation. That construction of the words "loss of contract" lends powerful support to the proposition, for which Mr Inatey contended, that cl 18.5 extended, in this case, to exempt his client from the consequences of (assumed but not proved) accepted repudiation. 3The particular claims in the cross-claim in respect of which summary judgment is sought, or which Macmahon seeks to have struck out, plead claims for damages flowing from various alleged breaches of the contract. The first claim, which culminates in paras 45 and 46 of the cross-claim list statement, is based on an alleged failure by Macmahon to exercise appropriate standards of care and skill, or to act consistent with "Good Industry Practice", in its performance of what are called "Upper Shaft Activities". It is also said that Macmahon failed to comply with a timing requirement under which those activities were to be completed by a specified date. 4The particularised damages assert: "Macmahon's failure to employ Good Industry Practice and delayed progress of the work caused a greater cost of labour, equipment and materials to be incurred then [sic] would have been reasonably necessary if Good Industry Practice had been followed. Further particulars will be provided following the preparation of evidence." 5I note that Macmahon had sought further and better particulars of this and other claims for damages. At one stage, there was a notice of motion seeking the supply of those particulars. It seems that some particulars have been supplied. I was not taken to their content. 6Resuming the narrative: in the alternative to the particularised breach, Cobar asserts that Macmahon claimed and received payment for costs unnecessarily and unreasonably incurred in respect of the Upper Shaft Activities. The background to that is that Macmahon is entitled to be paid something called "Actual Approved Cost" (and other matters) and that term includes "costs reasonably and properly incurred by" Macmahon in performing its contractual obligations. 7The submission put for Macmahon is that, on the proper construction of cl 18.5 of the contract and on the proper construction in particular of the defined term "Consequential Loss", the claim that has been particularised is one that is excluded; one in respect of which, by the terms of cl 18.5, Macmahon is to have no liability to Cobar. 8The proper construction of the definition of Consequential Loss is, as I said in my earlier reasons, a matter of some difficulty. Taking the definition backwards, it excludes two classes of loss. It excludes specified heads of loss: loss of profits, loss of production et cetera. It does so whether or not any or all of those specified classes of loss should be described as direct or as indirect losses. Then, apparently as a "catch-all" (and as I have indicated, looking at the definition in reverse), the definition excludes "any special or indirect loss or damage". 9There was much debate as to the content of the phrase "special or indirect loss or damage". On the face of things, it is unclear whether the words "special or indirect" are intended to indicate terms that have either opposed or not entirely consistent meanings, or whether that usage reflects what is not at all unknown in the English language: the use of two adjectives, separated by the disjunct "or", to describe one subject having one quality described or encompassed by both those adjectives. If I were to observe that the latter is a common or garden variety of English usage, the point becomes clear enough. 10Alternatively, of course, it may be that the drafter (and the parties, regarded objectively) had in mind that special loss or damage was one category and indirect loss or damage was another. 11It appeared to be common ground, and in my view is in any event the case, that so far as possible the approach to the construction of cl 18.5 (including in that the proper construction of the defined expression "Consequential Loss") is to be informed by the objective intention of the parties as it appears from the terms of their bargain; specifically, the summary of liability principles set out in cl 2. However, because cl 2 is not intended to have legal effect, and makes it plain that the parties' rights and obligations are to be found elsewhere in the language of the contract (cl 2.1(b)), if one reaches a point where the language used does not reflect, in part or in full, the expressed intention then so be it. Having said that, I accept of course that so far as possible, and without doing excessive violence to the language used, one would seek to construe the relevant provisions of the contract to give effect to what the parties said was their intention in agreeing to those terms. 12It seems to me that para (a) of the definition of Consequential Loss was intended to be part of the contractual bargain which gave effect to the intention stated in cl 2.3(f). 13Expressions such as direct loss, and consequential loss, have bedevilled lawyers and courts for many years. The expression "consequential loss" in particular is unfortunate. On the one hand, as Bleby J pointed out in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 at [281], the word "consequential" ordinarily comprehends both direct and indirect consequences. But equally, as Ryan J pointed out in GEC Alsthom Australia Ltd v City of Sunshine (FCA, 20 February 1996, unreported), in a passage extracted by Kenneth Martin J in Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356 at [109], at least in legal parlance the expression "consequential loss" is understood to connote "a loss at a step removed from the transaction and its immediate effects" or, in the context of the particular case, a loss which might be incurred by reason of inability to use plant or investment "for a purpose extraneous to that directly contemplated by the transaction documents". 14In addition, as Kenneth Martin J pointed out in Regional Power Corporation at [89] and following, it has been understood for some years, at least among lawyers who keep abreast with changes in the law, that the expression "consequential loss" should not be confined only to loss falling within the second limb of the well-known formula given by Alderson B, speaking for the Court of Exchequer Chamber, in Hadley v Baxendale (1854) 9 Exch 341 at 354-355. That point was made by Nettle JA (with whom Ashley and Dodds-Streeton JJA agreed) in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd (2008) 19 VR 358 at [93]. 15In those circumstances, it may well be, the drafter, and thus the parties, intended the expression "indirect loss or damage" to be a substitute, but not necessarily an exact equivalent, for the expression "consequential loss". 16In Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99, Atkinson J said at 103 that: "Direct damage is that which flows naturally from the breach without other intervening cause and independently of special circumstances, while indirect damage does not so flow." 17To my mind, that observation has great appeal. It looks to the causal relationship between the breach and the damage, not (as the rule in Hadley v Baxendale tends to do, at least in its application if not in its original formulation) to questions of remoteness. 18As a matter of language, if I may say so with respect, his Lordship's observations have continuing relevance, notwithstanding the apparent divergence that Nettle JA discerned, in Environmental Systems, between the way that the law in England has developed and the way that the law stands in Australia. 19If one applies the words of Atkinson J to the present case then indirect loss or damage is simply loss or damage which flows other than naturally from the breach, or which is related to the breach only because of some intervening cause or special circumstance. 20I am not sure that the word "special" is intended to add anything to the compound expression "special or indirect loss or damage". That is to say, my present inclination is to view the words "special or indirect" as intended to convey between them only that the loss or damage which they qualify is other than direct loss or damage. 21If that be the correct approach to construction then, for a loss to be excluded, it must meet one of two requirements. It must fall within one or other of the specifically excluded heads of loss (para (b)), or it must otherwise be "special or indirect" in the sense that, on my present understanding, that expression has. 22I have gone into this at some length not because I am to be understood as giving what I see as a definitive account of the proper construction of the exclusion but to understand why it is that in my view this is not an appropriate case either for summary judgment or for a strike-out order. 23It may be accepted, as a matter of language, that the way in which the particular claim that I am presently considering (the claim relating to the Upper Shaft Activities) could be taken to suggest that there is some lack of a direct causal relationship between the event and the loss claimed. But as Ryan J pointed out in GEC Alsthom, in the passage to which I have referred, the question of what is direct or indirect necessarily requires consideration of the purpose that is contemplated by the transaction documents - in this case, the contract made between Macmahon and Cobar. 24Further, and as Kenneth Martin J pointed out in Regional Power Corporation at [114] and following, one needs to have an understanding of the facts that are intended to be summarised or encapsulated by the particulars given. That was not a problem for Kenneth Martin J, because the application before him (which was the hearing of certain questions separately from and before the hearing of other questions in issue) proceeded on the basis of an agreed statement of facts. The argument before me has proceeded only on the basis of the assertions made in the pleading. 25Save for one matter, to which I shall turn in a moment, I do not think it can be said, with the necessary degree of confidence, that the particular aspect of damage with which I am now concerned is so plainly within the definition of Consequential Loss that it must be held to be defeated, without any investigation of the facts, by cl 18.5. 26The exception is that it was submitted that whether or not the damage was to be categorised as direct or indirect (or special or non-special), it must necessarily be a claim for loss of profits or loss of production or loss of the benefit of the contract. I do not think, however, that it is appropriate to read para (b) of the exclusion in quite so literal and dramatic a way. 27If that were the proper construction of the exclusion then there would be no need for the rest of the verbiage, because, analysed in the way that was advocated, any loss would follow through to the bottom line, or to the benefit of the contract. 28In assessing the relationship between breach of contract and recoverable loss, the law has always taken an approach of regarding some losses as recoverable but others as not recoverable. In this particular case, as in every other case of damages for breach of contract, whether or not a particular loss falls within a particular exception depends both on the proper construction of the exception and on the facts that are proved and found. 29I do not think that the claim for damages for breaches alleged arising out of the Upper Shaft Activities are susceptible of summary judgment or strike-out. 30There was another claim of the same general nature relating to something called a Blind Sink, or Blind Sink operations. That too involves assertions that Macmahon did not use appropriate standards of care and skill, or act in accordance with Good Industry Practice, and complete the work when it should have been completed. It was accepted that the reasoning that would, one way or another, dispose of the Upper Shaft Activities claim would also dispose of this claim. 31The remaining claim that requires investigation relates to what is called the "Kibble Incident". In this context, a kibble is some sort of bucket or conveyance in which goods and materials, and in this case human beings, may be transported. The Kibble Incident apparently describes circumstances where, it is said, a Macmahon employee used a kibble in a dangerous manner that was inconsistent with a number of procedures, both contractual and statutory, and hence in breach of relevant terms of the contract. That is said to have occasioned loss because, about six months after the Kibble Incident, there was another, and far more serious, incident involving the kibble when a Macmahon employee was killed. In relation to the latter incident, there was (as one might expect) an investigation. It is said that the costs of the investigation were increased because the investigation extended to the earlier Kibble Incident. 32Again, the submission is that the costs (both internal and external) incurred by Cobar fall within one or other of the limbs of the definition of Consequential Loss. Again, for the reasons I have given, I think that this is not something which can be determined in an a priori way on the basis of the particularised matters. I think it is something that needs to be considered in the context of the proper construction of the contract and in the context of facts that are proved and found. 33There were two other aspects of the cross-claim in respect of which the same relief was sought. One of those, relating to a claim of a restitutionary nature, was not pressed (that is to say, the claim for summary dismissal or strike-out in respect of it was not pressed). 34The other related to the contractual indemnity given by cl 18.1 of the contract. It is I think common ground, and in any event as a matter of pleading is clear, that the indemnity claim goes no further than the pleaded claims of breach. That is to say, as I understand the pleading, Cobar says that if for whatever reason it is not entitled to damages for breach of contract, it is nonetheless entitled to contractual indemnity in respect of the matters that have been pleaded as breaches. 35On that approach, the claim for indemnity does not require separate consideration. 36The consequence is that the notice of motion filed on 19 March 2014, which is the notice of motion with which I am dealing, should be dismissed insofar as it seeks an order for summary dismissal or an order striking out the relevant paragraphs of the cross-claim list statement. 37There remains alive a question of leave to amend which is raised by prayer 4 of that notice of motion. There may also remain alive the notice of motion for particulars. I will hear counsel on those matters and on the question of costs. (Counsel addressed.) 38The question of amendment has apparently been dealt with and no further order is sought. 39In relation to the motion for particulars, Macmahon wishes to have an opportunity of considering the particulars provided. The simplest course seems to me to be to stand the motion over, together with the matter generally, to the list on 11 July 2014. If the parties do not need to trouble the court on that date they can ask the court to make orders by consent. 40In relation to costs, they should follow the event of the motion and accordingly I order that the motion filed on 19 March 2014 be dismissed with costs. I order that the motion of 3 March 2014 be adjourned to the motions list on 11 July 2014 and that the matter be listed for directions on that day. I direct that the exhibits be handed out.