Port Macquarie-Hastings Council v Diveva Pty Limited

Port Macquarie-Hastings Council v Diveva Pty Limited - [2017] NSWCA 97 - NSWCA 2017 case summary — Zoe

headnote [This headnote should not be read as part of the judgment] In 2005, 2008 and 2011, the respondent, Diveva Pty Ltd (Diveva), successfully tendered and entered into contracts with the appellant, the Port Macquarie-Hastings Council (Council), for the supply and laying of asphalt. The contract contained an option clause which merely stated the period of the agreement "with a future twelve (12) month option available". Under the 2011 agreement, Diveva undertook asphalt works on Ocean Drive, Lake Cathie in July 2012. Those works showed signs of failure. The Council alleged that Diveva had not complied with the asphalting specifications contained in the 2011 agreement. On 11 March 2013, the Council advised Diveva that it would not exercise the option to extend the 2011 agreement and a new tender would be advertised. On 4 April 2013, Diveva gave notice that it would exercise the option to extend the 2011 agreement for a further 12 months. The Council asserted that the option could only be exercised by the Council or by mutual agreement. The Council invited tenders for the period after 31 July 2013. Diveva did not participate in the tender. No further work was offered to Diveva by the Council under the 2011 agreement after 27 May 2013. Diveva brought proceedings in the Supreme Court seeking damages for breach of contract. The primary judge found that the agreement conferred the right to exercise the option on Divevea (and not the Council) and that the Council had breached the 2011 agreement. He made an award of damages in the sum of $247,443, comprising an assessment of Diveva's lost profits for the option period and Diveva's lost opportunity successfully to tender for two further contracts with the Council. His Honour ordered the Council to pay Diveva's costs of the proceedings. The issues raised on the Council's notice of appeal were:

whether the primary judge erred in his construction of the option in the 2011 agreement;
whether the primary judge erred in his assessment of damages for breach of contract; and
whether the primary judge erred in awarding Diveva costs. Held, dismissing the appeal (Payne JA, Beazley A/CJ and Simpson JA agreeing):
The primary judge was correct in his construction of the option. The language repeatedly used in the 2011 agreement indicates that the extension of the term was offered by the Council to the successful tenderer. The commercial purpose of the option was as an inducement to tenderers: [37] - [40].
The Council failed to establish that the primary judge's assessment of damages was affected by error. Regarding the lost profits for the option period, his Honour's findings regarding Diveva's financial position were open on the expert evidence before him. Further, his Honour did not err in finding that Diveva's decision not to participate in the 2013 tender was not unreasonable: [64], [68]. Regarding the lost opportunity successfully to tender in the future, the primary judge was correct to conclude that this loss was compensable. But for the Council's breach of contract in 2012, there is every reason to think Diveva would have had a good chance of success in the next two tender processes. No error was shown in his Honour's assessment of those damages: [86], [98].
No House v The King error has been shown in the exercise of his Honour's decision that costs should be awarded as the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted: [106].

[5]

Brief facts

Diveva Pty Ltd (Diveva) is a civil construction company operating on the mid-north coast of New South Wales. In 2005, 2008 and 2011 Diveva was the successful tenderer for the supply and laying of asphalt to the Council. Contracts were entered into between the Council and Diveva in each of these periods.
The relevant contract in the present proceedings was entered into between Diveva and the Council in about August 2011 (2011 agreement). Under that contract Diveva contracted to supply, deliver and lay asphalt for a period of two years with a further one year option.
In about August 2011, Diveva undertook certain asphalt works on Ocean Drive, Lake Cathie. Those works failed. In the proceedings before the primary judge it was common ground that Diveva was not responsible for the failure of those works.
In May 2012, the Council excavated and reconstructed the area on Ocean Drive. Diveva again laid asphalt in late July 2012. In late 2012, Ocean Drive again showed signs of failure.
There was a dispute which was litigated before the primary judge about responsibility for the failure of the 2012 Ocean Drive works. Specifically, the issue was whether the works were in compliance with specifications in the 2011 agreement between Diveva and the Council.
On 11 March 2013, the Council advised Diveva that it had reviewed the current tender contract specification and determined that the option to extend the 2011 agreement would not be exercised and a new tender would be advertised in the coming weeks.
On 4 April 2013, Diveva gave notice of exercise of the option to extend the 2011 agreement for a further 12 months. On the same date, the Council asserted that the option to extend the 2011 agreement could only be exercised by mutual agreement.
The Council invited tenders for the period after 31 July 2013 identifying different specifications to be included in further contracts. Diveva did not participate in the tender. No further work was offered to Diveva by the Council under the 2011 agreement after 27 May 2013.
Diveva brought proceedings against the Council in the Common Law Division of the Supreme Court seeking damages for breach of contract. The primary judge found that the Council had breached the 2011 agreement and made an award of damages in the sum of $247,443.
The issues in the proceedings before the primary judge were: 1. whether the option in the 2011 agreement was exercisable unilaterally by Diveva; 2. assuming that the option was exercisable by Diveva, whether a term ought to be implied into the 2011 agreement to the effect that the option was not exercisable if Diveva was in breach of the agreement at the time of the exercise. The relevant breach asserted by the Council was the failure of the 2012 Ocean Drive works by reason of the non-compliance by Diveva with a specification in the contract; and 3. the amount of damages, if any, to which Diveva was entitled if it was successful in these proceedings.

[6]

Terms of the contract

The 2011 agreement was in three parts. It contained an "information for tenderers" section, a "tender response" section, into which a tenderer inserted its price offer and an "instrument of agreement" section.
The "instrument of agreement" described the period of the agreement as being "for the period: 1 August 2011 to 31 July 2013 with a further 12 month option available".
The relevant terms of the 2011 agreement were: Instrument of Agreement Agreement made the Tenth day of August 2011 Between: PORT MACQUARIE-HASTINGS COUNCIL ("Council") and Midcoast Road Services (Hereinafter and in the documents annexed hereto called the "Tenderer") of the other part, it is agreed that the Tenderer shall supply and deliver to Council and Council shall purchase from the Tenderer, in accordance with all Tender documents, goods and services as detailed in the Tender documents at the prices and in accordance with the terms and conditions as set out in the Tender Agreement. INFORMATION FOR TENDERERS This tender is for the: Supply & Lay of Asphaltic Concrete (AC) for a period of twenty-four (24) months, with a further 12 month option. … SECTION 1: GENERAL CONDITIONS … 7. TERMINATION OF AGREEMENT & DISPUTES Should Council be dissatisfied with the Tenderers performance under this Tender Agreement and in particular the condition, quality or capacity of any materials, equipment or services supplied under this Tender Agreement, the relevant Council is to notify the Tenderer in writing of the complaint within 14 (Fourteen) days. If this complaint cannot be resolved, the relevant Council may terminate the Tender Agreement by giving 30 (Thirty) days written notice to the Tenderer. Where the Tender Agreement is terminated, if necessary, payments owing will be amended to actual work completed and deductions made for any additional costs of completion. If the Tenderer, without the consent of the relevant Council, withdraws its services or fails to supply services as and when required before the completion of any work specified, or commits any other breach of this Tender Agreement, then the affected Council may recover from the Tenderer any costs, expenses or damages thereby incurred. The Tenderer must confirm their withdrawal in writing. 8. WORK DURING DISPUTES Notwithstanding the existence of a complaint, the Tenderer shall at all times continue to fulfil all their obligations under this Tender Agreement and comply with all directions given to the Tenderer by Council in accordance with the provisions of this Tender Agreement. 9. DISPUTE RESOLUTION Any party claiming that a complaint has arisen must notify the other parties giving details of the complaint. During a 21 (Twenty-One)-day period after a notice is given of a complaint under clause (6) above, each party must use its best endeavours to resolve the dispute, by conferring at least once, or to agree on methods of doing so. At every such conference, a person who has the appropriate authority to agree to resolutions or methods shall represent each party. All aspects of every such conference, except the facts of occurrence, shall be privileged. If, after a 21-day period from the date of the first notices of complaint the complaint has not been resolved, then the complaint may be referred for mediation. If mediation is required, it shall be done so in the presence of a mediator appointed by Council and paid for equally between Council and the Tenderer. 10. GENERAL TERMS OF AGREEMENT ALL TENDERERS ARE TO TAKE NOTE OF THE FOLLOWING GENERAL TERMS OF AGREEMENT. THESE TERMS WILL BE ENFORCED THROUGHOUT THE LIFE OF THE RESULTING CONTRACT. a) Supply shall be, in all respects, in accordance with any specifications supplied by Council. b) This Tender Agreement is for the supply and lay of asphaltic concrete (AC) within the Port Macquarie-Hastings Council local government area. c) The period of this Tender Agreement twenty-four (24) months commencing on the 1st August 2011 to 31st July 2013 with a further twelve (12) month option available. d) All materials and / or workmanship shall be guaranteed for a minimum period of twelve (12) months from the date of placing the goods in service. e) Council may reject any goods or equipment supplied by the Tenderer, which it may deem to be of inferior quality or contrary to any specifications supplied by Council. f) Council reserves the right to cancel the whole or any part of any order placed with the Tenderer, for non-compliance with the terms of the specification or those conditions and Council shall further be entitled to cancel or reduce the order by giving two (2) days written notice. In neither case shall the Tenderer have any claim to compensation for any loss or damage he/she may deem himself to have suffered thereby. g) Council reserves the right to obtain goods or services from other suppliers should delivery times be considered unacceptable, or product quality is deemed to be inferior, or if prices are deemed to be excessive compared to the current market for such goods or services, or Council decides to utilise another product for whatever reason, in place of those already tendered for. h) Council reserves the right to obtain good or services from other suppliers if the successful tenderer is unable to provide the required quantity for any particular project, whether this is determined at the outset of the project or mid way through the project. In this case the Tenderer shall not have any claim to compensation for any loss or damage he/she may deem themselves to have suffered thereby. i) Where Council undertakes a specific project which requires the one-off purchase of large quantities of goods that would, in the normal course of business, be supplied under this Tender Agreement, Council reserves the right, without infringing upon this Tender Agreement to either: I Renegotiate the Tender Agreement rate for the required goods with the Tenderer. If this does occur, then the re-negotiated rate shall only apply to the goods for the purpose of that specific project unless otherwise agreed or; II Call for official quotations or tenders for goods to be used in the specific project. ……. 13. PURCHASE ORDERS Purchase Orders The Tenderer agrees that each time Council places a Purchase Order, that a separate Purchase Order Contract is formed on the date of the receipt of the Purchase Order by the Tenderer. The terms & conditions of the Purchase Order Contract are those appearing in this Tender Agreement and: 1) The Purchase Order (including any additional Purchase Order Conditions); and 2) Any variations of the Purchase Order Contract as may be made in accordance with that contract. (Please note that the standard provisions of a Purchase Order Contract shall not be varied except by agreement in writing signed by both parties and having first obtained the consent in writing of the Principal). At all times, the Tenderer must refer to Councils official Purchase Order Number on all documentation such as delivery dockets, tax invoices, statements or any other correspondence that may be related to the supply of goods or services, in accordance with this Tender Agreement. Failure to do so may result in non-payment of invoices. …. 21. EMERGENCY & URGENT ORDERS Tenderers are required to provide Council with a strategy for the supply of an emergency or urgent service. This service will need to accommodate emergencies that may occur both within and outside normal business hours. Emergency & urgent orders are to be made in the minimum possible time to the location nominated on the Councils order. The Tenderer shall supply to Council a register of names and contact details of the Tenderers officers who can be contacted at any time for this purpose. SECTION 2: TENDER SUBMISSION INFORMATION 1. TENDER AGREEMENT The period of this Tender Agreement is for twenty-four (24) months with a further twelve (12) month option available. SECTION 3: TENDER EVALUATION & SELECTION 1. TENDER EVALUATION AND SELECTION Please note that Council reserves the right to appoint a panel of tenderers for this tender if deemed appropriate. This means that council may wish to appoint more than one tenderer to a panel of successful suppliers, which will allow Council to select the best possible solution for each particular job, in particular regions within the Port Macquarie-Hastings Local Government Area.

[7]

Construction of the option

The primary judge determined that, on its proper construction, the 2011 agreement conferred an option upon Diveva which it could exercise unilaterally to extend the agreement for a further 12 month period. That conclusion was essentially based on the text of the agreement.
The primary judge found that an "option" of its nature was consistent with an entitlement granted by the Council and available to the successful tenderer. His Honour found that consideration of the 2011 agreement, as a whole, favoured the construction for which Diveva contended. It would have been open to the Council simply to have said in the contract that the option could only be exercised by the Council.
As to whether a term should be implied in the 2011 agreement, the primary judge found that the onus of proving that the term should be implied into the agreement rested upon the Council and that the principles in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 for implication of contractual terms tended against implication of such a term in this case. Such a term would not operate reasonably or equitably between the parties and it was not necessary to give business efficacy to the agreement.
His Honour determined, assuming a term was implied, that Diveva had not breached the 2011 agreement. The expert evidence led by Diveva on this issue was effectively unchallenged. There was no contract specification requiring Diveva to undertake testing for in situ voids. The Council was in error in taking a contrary view. Accordingly there was no basis for finding a breach of an express or implied term in the 2011 agreement by Diveva.
So far as the third issue, damages, was concerned, the primary judge was faced with competing expert evidence. The damages claimed had two components: first, damages for the 12 month period of the option and secondly, damages for the lost opportunity to compete effectively in subsequent tenders for asphalting work with the Council.
The experts prepared a model which was the subject of a joint experts' report. The critical difference between the experts was that the expert retained by Diveva, Mr Mullins, on the assumptions he made, calculated that Diveva had suffered considerable damages, while the expert retained by the Council, Mr Ross, was instructed to perform an essentially destructive exercise. He was not asked to calculate the damages suffered by Diveva.
As to the option period, his Honour had evidence before him of the revenue earned by the successful tenderer from the Council during the option period. The matters in dispute comprised the gross margin Diveva would have earned and whether the 2011 agreement would have been unprofitable, and/or whether Diveva would have been insolvent in 2013 and thus unable to complete the option. His Honour concluded that so far as the gross margin was concerned, despite there being a general period of decline in Diveva's overall gross margin, the fact was that Diveva achieved a gross margin under the 2011 agreement in the initial 12 months of the contract in the order of 16%. His Honour adopted that percentage for gross margin in the option period and in the subsequent lost opportunity periods. His Honour concluded that the 2011 agreement, if completed, would have been profitable and that Diveva would have been solvent in 2013 and able to complete the option.
As to the lost opportunity to compete effectively in subsequent tenders for asphalting work with the Council, the primary judge accepted that it was reasonable and appropriate to estimate Diveva's prospects of winning the two subsequent tenders as being respectively an 80% chance and a 60% chance. In drawing these conclusions, his Honour found that: 1. the Council's incorrect belief in the manner of operation of the 2011 agreement (which his Honour addressed in dealing with the Council's implied term argument addressed at [20] above) was the effective cause of Council's breach of contract in repudiating the option; 2. over a period of almost a decade prior to that incorrect view being formed, the parties had a satisfactory and harmonious commercial relationship; and 3. on the balance of probabilities, but for the Council's incorrect view about the construction of the 2011 agreement, which led to its repudiation of the option, there was a strong likelihood that the Council would have entered into further contracts with Diveva following the option period on two occasions.
As to calculation issues, his Honour preferred the evidence of Diveva's expert Mr Mullins and said it provided a rational basis for finding loss. Accordingly his Honour determined that judgment for Diveva in the sum of $247,443 should be entered.
Finally, the primary judge heard the parties in relation to costs on 14 December 2016. The parties were in dispute regarding whether Diveva was entitled to costs, having regard to r 42.34 of the Uniform Civil Procedure Rules 2005 (NSW). That rule provides that an order for costs may be made, but will not ordinarily be made, when the plaintiff would otherwise be entitled to costs and judgment is entered for an amount less than $500,000. On 15 December 2016, the primary judge determined to exercise his discretion and award costs to Diveva given the complexity of the proceedings, the volume of evidence required and the forensic accounting work undertaken by the expert witnesses.

[8]

Grounds of appeal

On 30 January 2017, the notice of appeal was filed containing four grounds of appeal: 1 The primary judge, Hall J, erred in construing the agreement between the parties (the Agreement) as containing an option to extend the Agreement for a twelve-month period, exercisable by the Respondent (Diveva) as a result of: a. Disregarding or giving insufficient weight to the circumstances known to both parties that, in respect of earlier contacts the option in identical terms had been exercised by the Appellant (Council); b. failing to have sufficient regard to the factual matrix and the Agreement as a whole, in particular as to the commercial benefit and convenience in respect of the option being available to the Council; c. treating the contra proferentem rule as applicable; and d. having regard to assumptions as to the costs of tendering and its influence of the commercial benefits and behaviour of Diveva, which were not established by the evidence. 2 The primary judge should have held, that on its true construction, the Agreement was for twenty-four months with an option for a further 12 months available to the Council (or alternatively by mutual agreement) without the requirement of a further tender. 3 The primary judge erred in awarding Diveva damages, calculated on the basis that: a. a historical decline in Diveva's profitability over the period of a number of years should be disregarded in favour of accepting a single year in which such decline was reversed where such acceptance implicitly contained an assumption that such reversal reflected underlying prospects of growth and improvement when no person from Diveva or with knowledge of its business plan, management, application of resources gave evidence supporting the assumption; b. it was unlikely that had a subsequent tender, made in mitigation of damage, been made by Diveva, it would have been considered by Council, in circumstances where the witnesses called by the Council denied that was the case and no person from Diveva gave evidence of the reasons it did not retender for the work; c. damages were recoverable in respect of periods beyond the Agreement and alleged option term based on a loss of opportunity to obtain further work, described as the First Renewal Period and the Second Renewal Period, where such damage: i. was too remote; ii. was not supported by any evidence given by some one on behalf of Diveva of the ability or intention to tender for such work; iii. Diveva in fact obtained work and applied its resources elsewhere; and d. in concluding with regard to the First Renewal Period and the Second Renewal Period that the [sic] was 80% and 60% chance respectively such work would have been obtained, it was done so without regard to the both the potential political and management changes of Council and obligations of Council to consider tenders without regard to the factors adverted to by the primary judge. 4 The primary judge erred in awarding Diveva its costs of the proceedings (Costs Judgement) as a result of concluding that an expert accountants opinion (from which that expert subsequently resiled) as to the calculation of Diveva's loss warranted the commencement of the proceedings in this Court in circumstances where the profitability and financial circumstances of Diveva and potential losses were known or should have been known to Diveva.

[11]

The Council's submissions

The Council submitted that the primary judge erred in finding that the option was unilaterally exercisable by Diveva for four reasons.
First, the Council submitted that the primary judge gave limited weight to the fact that the option in issue was in the same terms as two options previously exercised by the Council in prior contracts with Diveva. The Council submitted that this was an objective fact, known by both parties, that favoured a construction consistent with prior conduct. The Council submitted that the letters by which the earlier options were exercised were contractual documents that were admissible: Angas Securities Ltd v Small Business Consortium Lloyds Consortium No 9056 [2016] NSWCA 182.
Secondly, it was submitted that the primary judge was inconsistent as he gave little or no weight to the options in preceding contracts (which were in identical terms, but for dates), but relied on previous dealings to determine the loss of opportunity claim in respect of damages.
Thirdly, the Council submitted that his Honour's conclusion regarding the commercial objective of the option - i.e., an inducement to Diveva to tender for the agreement - was inconsistent with the subject matter of the 2011 agreement, which was to provide terms and conditions for further contracts, rather than a contract under which services were delivered. It was submitted that the option conferred no commercial advantage on Diveva because the exercise of the option did not oblige the Council to provide Diveva with any work. The Council submitted that the actual commercial benefit of the option, and its convenience, required its exercise to be at the Council's unilateral discretion.
Fourthly, the Council submitted that the primary judge erred by using the contra proferentem principle to determine the construction of the 2011 agreement regarding the option. It was submitted that the Council could not be treated as the proferens in circumstances where Diveva was the party relying on the clause but had knowledge of the Council's exercise of previous options. The Council submitted that his Honour should only have used the contra proferentem rule in the event that the construction was otherwise intractable and all other tools of interpretation failed.

[12]

Consideration of grounds 1 and 2

The oral submissions made by the Council commenced by characterising the 2011 agreement as a "preferred supplier agreement". That characterisation cannot be accepted. The Council's submissions, by focusing on this unhelpful label, tended to obscure the rights and obligations of each party to the 2011 agreement. Those rights were of value to Diveva. The primary judge's construction of the option clause was in my view correct for a number of reasons.
First, the language used by the parties is tolerably clear. The language repeatedly used in the 2011 agreement - "twelve (12) month option available" - indicates that the extension of the term was being offered by the Council to the successful tenderer. That language does not qualify the right to exercise the option, which is to be contrasted with qualifications used elsewhere in the agreement.
Secondly, the fact that the Council, but not Diveva, had a right to terminate the agreement other than for repudiation or breach of an essential term tends against the construction contended for by the Council. The Council's rights to terminate were significantly greater than those granted to the successful tenderer. When considering the factual matrix and commercial objectives (the Council's grounds 1(b), 1(d) and 2), the inclusion of an express termination power for the sole benefit of the Council supports the view that the commercial purpose of the option was to permit the successful tenderer to extend the term of the agreement if it so chose. The fact that the option did not specifically oblige the Council to give Diveva work (if, for example, there was no asphalting work to be done) is of no moment, as the 2011 agreement is an exclusive agreement subject to conditions and carve-outs. That is, subject to those conditions and carve-outs, the Council was obliged to give asphalting work to Diveva under the 2011 agreement. The Council's submission that this promise by the Council, qualified though it was, was of "no benefit" to Diveva is incorrect and has its origin in the unhelpful label the Council sought to apply to the agreement as a "preferred supplier agreement". Prior to the breakdown in relations over the Council's incorrect construction of Diveva's responsibilities, which led to the breach of contract by the Council, the contract was plainly a thing of value to Diveva. Diveva's continued successful tendering for such contracts, over a decade, shows its value to Diveva. This conclusion makes it improbable that the commercial purpose proffered by the Council is correct.
Thirdly, the primary judge was correct to find the commercial purpose of the option was as an inducement to tenderers. The option was fairly clearly intended to act as an inducement to tenderers to submit a tender. An objective observer would regard it as unlikely that the Council could, by reason of the option, unilaterally bind the successful tenderer to continue to supply the Council with asphalt at the same price at the end of the initial term. The Council's submission that his Honour's finding gave rise to a "commercial nonsense" or a "commercial inconvenience" should be rejected. There is nothing inconvenient, let alone nonsensical, in treating the Council's promise of an option for one year at the end of the initial term as an inducement to tenderers. Participation in a tender process involves costs to the tenderer. The "preferred supplier agreement" and its corollary, the assertion that Diveva's rights under the agreement should be set at naught, underlay the submission that the purpose identified by the primary judge effected "commercial nonsense". Once that incorrect premise is removed, as it must be, there is nothing inconvenient or nonsensical about his Honour's construction.
Fourthly, the successful tenderer needed to arrange its affairs to ensure it had sufficient resources to comply with the contract. It is inconsistent with that commercial context that the successful tenderer would need to put itself in a position to fulfil a commercial contract in circumstances where the Council had reserved to itself a unilateral option simply to submit the matter for a further tender at the completion of the initial period. Whilst it is true, as the Council submitted, that its obligation to provide work to a successful tenderer was limited by the terms of the 2011 agreement, particularly clauses 10(g), (h) and (i) quoted above, it was not correct to say that the Council's obligations were "not positive obligations", as was submitted. Again, this reflected the unhelpful focus on the 2011 agreement as a "preferred supplier agreement".
Fifthly, the evidence concerning the previous exercise of options in similar terms in earlier agreements (appeal grounds 1(a) and 2), is at best equivocal. This material was, in any event, of little weight when construing a different and later contract. When construing the 2011 agreement, extrinsic evidence unique to the parties about the exercise of a similarly worded clause in another contract must be treated with great care. The evidence showed that in each case the Council wrote to Diveva and purported to exercise the option. Diveva was apparently happy to accept that notification. In the absence of any pleading or reliance on an estoppel or some other doctrine of preclusion by the Council, that evidence does not assist in the construction of the 2011 agreement.
Angas Securities, which was relied upon by the Council and referred to above at [33], does not establish that this evidence about the Council's asserted belief about its rights to exercise an option in a prior agreement (and Diveva's alleged "acquiescence" in that belief) are an aid to determining the proper construction of the option in a subsequent agreement. Angas Securities, at [15] ‑ [23], addresses the admissibility, in the sense of use as part of a process of reasoning, of a letter of offer sought to be used to interpret an ambiguous clause in a subsequent deed of release. Angas Securities provides no support for the Council's attempt to use evidence of its belief about the proper construction of the option provision in earlier agreements with Diveva, as an aid to construction of the option provision in the 2011 agreement.
Sixthly, the Council's complaint about alleged inconsistency in the way the primary judge addressed commercial background evidence in the context of construction, on the one hand, and damages, on the other, should also be rejected. The primary judge was obliged when considering the question of construction to treat extrinsic evidence in the careful way he did by a long line of High Court authority including Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 and the subsequent cases that have applied Codelfa. In addressing damages, the primary judge was obliged to conduct a different exercise. The asserted "inconsistency" in treating extrinsic evidence did not arise.
Seventhly, the primary judge only relied on the contra proferentum rule in rejecting an argument advanced by the Council below. He described it "perhaps as providing additional support for the construction he had, for other reasons, determined to be correct". The contra proferentum rule is a rule of last resort. It was not misused by the primary judge in the limited role he gave it as "perhaps" providing additional support for the construction he preferred.
Finally, the Council's fall back argument that the option provision was only exercisable by mutual agreement and, in reality, was not an option at all, should also be rejected. The deliberate choice by the parties of the word "option" distinguishes the promise from an agreement to agree, which would otherwise be the position. If the "option" granted was construed only as an agreement to agree, it would have no real content. A construction in these terms would ignore the words specifically chosen by the parties. In addition, such a construction is inconsistent with the purpose and context of the option provision for the reasons I have given above.
Grounds 1 and 2 of the notice of appeal should be rejected.

[14]

Relevant principles

There was no real contest between the parties about the principles to be applied in assessing damages. Rather, the contest lay in the application of those principles.
Damages awarded for breach of contract protect a plaintiff's expectation of receiving the defendant's performance. The amount of damages will therefore be commensurate with such expectation, proven on the balance of probabilities: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; [1991] HCA 54 at 80 per Mason CJ and Dawson J: The award of damages for breach of contract protects a plaintiff's expectation of receiving the defendant's performance. That expectation arises out of or is created by the contract. Hence, damages for breach of contract are often described as "expectation damages". The 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.
A plaintiff must prove on the balance of probabilities some loss or damage. In a case such as the present the plaintiff shows some loss or damage by demonstrating that the contravening conduct caused the loss of commercial opportunity which had some value: Sellars v Adelaide Petroleum (1994) 179 CLR 332; [1994] HCA 4 at 355.
Determining what would have occurred, but for the breach, involves a degree of estimation when considering the evidence of future events relevant to the calculation of damages, which is necessarily hypothetical: Amann Aviation at 94.
In this case, this estimation was made more difficult by the fact that the dispute between the parties which ultimately led to the repudiation by the Council of the agreement adversely affected Diveva's earnings in the latter part of the 2011 tender process.
I will explore the relevant legal principles further in relation to ground 3(c) of the notice of appeal where the parties are at issue in the application of those principles.

[16]

Consideration of Ground 3(a)

Somewhat surprisingly, given this ground of appeal, the Council accepted that in 2015, being the last period addressed by the evidence, Diveva was not insolvent on a balance sheet test. It was submitted, however, that Diveva was insolvent on a balance sheet test in 2013 and the primary judge should have so concluded. The fact that Diveva was able to trade out of that "insolvency" by the sale of certain assets in 2015, it was submitted, could not have been foreseen in 2013.
Again, somewhat surprisingly, it was submitted that the 2013 balance sheet for Diveva in its Financial Statement demonstrated that Diveva was insolvent. The references given by counsel were to various profit and loss statements for Diveva. The balance sheet for Diveva for the year ended 30 June 2013, however, shows that Diveva had positive net assets and was not insolvent. No reason other than alleged balance sheet insolvency in 2013 was advanced under this ground.
The Council correctly submitted that Wenham v Ella required the Court to take into account events following the breach for the purposes of calculating damages. In relation to this ground, the issue was whether Diveva was insolvent or was likely to become insolvent during the period for which damages were being assessed. Information regarding Diveva's solvency in 2015 was available to the primary judge. That evidence showed that Diveva was solvent in 2015 on a balance sheet test. The evidence about solvency in 2015 does not suggest that an inference can be drawn that Diveva was insolvent at any time.
A second problem with this ground of appeal is that when assessing damages for breach of contract in the present case, the relevant task was to compare the position Diveva was in with the one it would have been in had the 2011 agreement been performed. Much of what the Council submitted under this ground went to a different topic, namely asserted problems with Diveva's business which led to the "balance sheet insolvency" in 2013. In the absence of any evidence that Diveva was insolvent on a balance sheet test, and there was no such evidence, the Council's complaints were not relevant to any issue truly in contest. In this regard, the repeated assertions, made both in writing and orally, that Mr Pinson from Diveva should have been called to explain Diveva's updated financial position should be rejected. That evidence was not required to throw light on any relevant topic which it was necessary for the primary judge to address.
Whilst no doubt the Council would have sought to cross-examine Mr Pinson to try and support its insolvency thesis, the fact is that thesis was devoid of evidence. Diveva were entitled to take the view that it was unnecessary to call Mr Pinson to rebut any inference otherwise available to be drawn on the basis of the documentary evidence and evidence led by the Council.
On the question of damages, the primary judge was faced with competing expert evidence. The Council's expert, Mr Ross, was instructed not to seek to identify any loss caused by the breach of contract but rather to perform a destructive exercise upon the evidence of Diveva's expert, Mr Mullins. It is noteworthy that Mr Ross nowhere opines that Diveva was or was likely to be insolvent on any test. No doubt to present expert accounting evidence expressly limited in this way was a forensic choice open to the Council. Consequently, however, the assistance the primary judge was able to obtain from Mr Ross' evidence was limited. Mr Mullins was the only expert who actually grappled with the task confronting his Honour of calculating the damages, if any, suffered by Diveva by reason of the Council's breach of contract. His Honour was not obliged to reject Mr Mullins' evidence of damages on the basis of submissions that Diveva was insolvent or likely to be insolvent on a balance sheet test in 2015, 2013 or any other date relevant to the determination of damages.
Ground 3(a) of the notice of appeal should be rejected.

[18]

Ground 3(b) - consideration

In my view his Honour did not err in failing to find that Diveva's conduct was unreasonable. The primary judge considered this issue in detail in his judgment. The primary judge found at [266] that: 1. the Council had wrongly taken a strong adverse view of Diveva both as to its performance of the 2012 Ocean Drive works and in its insistence upon the proposition that the C245 Specification placed no responsibility upon it in relation to in situ voids; 2. it would have been a futile exercise for Diveva to have again tendered knowing the extremely strong and adverse views held by the Council about Diveva, which views were still current; and 3. it was not reasonable to have expected Diveva to have participated in the tender, having regard to the fact that the relationship between Diveva and the Council was clearly strained by reason of the dispute about the 2012 Ocean Drive works. It is readily apparent that the Council had formed an erroneous view that Diveva could not and would not perform the 2011 agreement. In that circumstance it was not necessary that Diveva engage in the potentially futile exercise of tendering again. This was borne out in the cross-examination of Mr Randall who admitted that he had formed the view that the 2012 Ocean Drive works were non-compliant with the relevant specification, that Diveva was responsible for the problems with Ocean Drive and that he was disappointed with the way Diveva had responded to the dispute about the 2012 Ocean Drive works. When asked whether he wanted to engage Diveva to do any further work, his answer was equivocal. Likewise, Mr Sharp admitted that he was aware that there were a number of issues arising with the asphalt laid by Diveva at Ocean Drive and he did not believe Diveva was willing to fix works which he considered to be defective, even though able to do so. 4. Mr Randall's and Mr Sharp's evidence that they remained in favour of Diveva being appointed as tenderer defies logic and was not accepted by the primary judge; 5. the Council had advised Diveva that it was not prepared to accept Diveva's exercise of the option in the 2011 agreement and that a new tender would be advertised with updated specifications. This position was maintained notwithstanding the Council's subsequent request of Diveva to alter the specifications which applied to work performed under the 2011 agreement; and 6. the Council officers who had formed the erroneous views about Diveva's compliance with the 2011 agreement were involved in the Tender Evaluation Panel and/or the recommendation to the Council for the appointment of tenderers relating to the supply and laying of asphalt.
The primary judge concluded, in the light of these detailed findings of fact, that participation in the tender by Diveva, itself very expensive and time consuming, would likely have been a futile exercise.
In my view, the primary judge was correct to conclude that it was unnecessary for Diveva to engage in the likely futile and expensive process of tendering again. It is to be recalled that the relevant tender was being conducted by the Council in the period during which, for the purposes of this damages calculation, Diveva was entitled to the benefit of the option which it had exercised. It was only by reason of the repudiation of the contract by the Council that this tender was being conducted.
The unlikelihood of Diveva successfully retendering was evident following the evidence of the relevant Council officers, Mr Randall and Mr Sharp, who had plainly formed an antipathy to Diveva based on their incorrect construction of the contractual obligations of Diveva under the 2011 agreement. His Honour was correct so to conclude. The primary judge did not accept the evidence of these two witnesses that they remained in favour of reappointing Diveva, if Diveva had only tendered. There is no basis in my view to disturb those conclusions, made having seen those witnesses give evidence. His Honour's conclusion was not glaringly improbable or inconsistent with established facts: Fox v Percy (2003) 214 CLR 118; [2003] HCA 22.
Ground 3(b) should be rejected.

[19]

Ground 3(c) - the Council's submissions

Ground 3(c) of the notice of appeal concerns the damages available in relation to the renewal periods. The Council made essentially three overlapping submissions on this topic.
The first submission was that the primary judge erred in his findings about the renewal periods because: 1. there was "no evidence" that Diveva intended to participate in a tender beyond the 2011 agreement, was able to so tender, would have tendered on terms more favourable than other tenderers or was able to complete any works if it successfully tendered; and 2. Diveva's incumbency, which the primary judge regarded as an advantage, did not necessarily give Diveva an advantage. The Council's decision on a tender would have been impacted by a myriad of factors and incumbency did not guarantee an advantage. The Council emphasised a number of matters which it submitted distinguished this case from the facts in Amann Aviation.
The second submission was that the primary judge effectively reversed the onus of proof in relation to establishing lost opportunity by finding that it was for Council to demonstrate Diveva's likely failure to succeed, rather than Diveva establishing its likelihood of successfully participating in the later tenders.
The Council submitted that, since the Council had a right to terminate the 2011 agreement on 30 days' written notice following an unresolved dispute, the Council had an entitlement to terminate in this case which should have led the primary judge to reject Diveva's claim, particularly in light of his Honour's finding that the Council had an adverse attitude towards Diveva. It was submitted that there was also evidence before the primary judge that Diveva had sold part of its business in 2015 which, it was submitted, would have made success in future tenders less likely.
It was submitted that the failure of Diveva to lead evidence on the issue of retender did not permit the finding of damages arising from a continued desire for the work. It was said that TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 156B-C, applying principles derived from The Mihalis Angelos [1971] QB 164, established this proposition.
The third basis on which the Council challenged the primary judge's conclusions on damages relating to the renewal periods was causation. It was submitted that on a common sense approach to causation it cannot be said that, but for the Council's breach, Diveva would likely have retendered and won the contracts in the future. It was also submitted that the loss referable to the renewal periods was too remote: Wenham v Ella. The Council submitted that: Nothing in the circumstances permits an inference that the parties contemplated that a consequence for Diveva would be its losing the opportunity to be a preferred service provider beyond the end of the two or three years to which the Agreement related. Where such contemplated possibility had to take into account the Council's obligations, including having regard to the obligation to call for fresh tenders and the potential changes in circumstances, such an inference would be expressly rejected.

[20]

Ground 3(c) - consideration

A contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for the loss of that advantage or opportunity: Amann Aviation at 92 (per Mason CJ and Dawson J), 102‑104 (per Brennan J) and 118‑119 (per Deane J).
The lost opportunity to successfully participate in a future tender can be compensable as a probable result of a breach of contract: Amann Aviation at 92 per Mason CJ and Dawson J.
Damages for deprivation of a commercial opportunity which occurred by breach of contract are ascertained by the court's assessment of the prospect of success of that opportunity had it been pursued: Sellars v Adelaide Petroleum at 355 (per Mason CJ, Dawson, Toohey and Gaudron JJ).
A defendant to proceedings to recover damages for breach of contract has the right under the contract to alternate methods of performance; it should be assumed that the contract will be performed in the way most advantageous to the defendant: The Mihalis Angelos. At least one important qualification to that principle is that when the facts available to the court, up to the date of the trial, demonstrate that the defendant would not (leaving to one side the circumstances of the breach of contract which has been found) have acted so as to perform the contract in that more advantageous way, the natural inference that the defendant would be understood to do so for the purposes of the damages calculation does not arise: TCN Channel 9 v Hayden Enterprises at 150, 156 and 163. As Deane J explained in Amann Aviation at 133: The "rule" recognized in cases such as The Mihalis Angelos does not require an assumption that, after full performance of a contract, the defaulting party would have acted against his own interests and obligations by, for example, declining to accept the most favourable tender for a further contract. It is no more an answer to Amann's claims to say that the Commonwealth might, at the end of the day, have arbitrarily refused to deal with Amann than was the possibility that the defendant might have arbitrarily refused to give the plaintiff a prize in answer to the claim in Chaplin v. Hicks or the possibility that the defendant might have acted unreasonably in answer to the plaintiffs' claim in Abrahams v. Herbert Reiach Ltd…
After reciting the relevant legal principles the primary judge approached the question of Diveva's lost opportunity to successfully participate in future tenders on the basis of the factual findings I have set out above. In particular, his Honour found: 1. he should approach the assessment on the basis of a decision of a reasonable Council, that is, one with the correct understanding of the prior relationship between the parties and importantly the C245 Specification, being the specification which formed the basis, so the primary judge found, of the falling out between Diveva and the Council and which incorrect understanding ultimately led to the breach of contract by the Council by repudiation; 2. he should not take into account for the purposes of damages calculation those aspects of the Council's conduct by which it acted "wrong-headedly" and which were at the heart of the decision made by the Council to repudiate the contract; 3. as a result of Diveva's long and successful incumbency and the matters referred to in contemporaneous documents such as the 2011 Council minutes in which the recommendation of Diveva's appointment was made, there was a high prospect that but for the breach of contract by the Council, Diveva would receive the grant of a further two contracts; 4. the percentage chance of success assessed by the primary judge was 80 per cent for the first renewal period and 60 per cent for the second renewal period.
While the Council emphasised that the breach of contract found against it was limited to the repudiation following its taking an incorrect view about the option in the 2011 agreement, the findings of the primary judge were that the dispute which arose in 2012 leading to that repudiation was solely about the specifications regarding the Ocean Drive works.
In my view, the primary judge was correct not to analyse the conduct of the Council relevant to damages as limited to construction of the option, divorced from the course of conduct directly relevant to Council's repudiation of the contract. Put another way, it is not permissible to divide up the Council's repudiatory conduct in the way suggested by the Council. It was a critical part of the Council's case before the primary judge regarding the exercise of the option that Diveva was in breach of the 2011 agreement by taking the view it did about the relevant specification. The Council litigated that issue before the primary judge and lost. His Honour was correct to conclude that the two issues were inseparable.
In my view, the primary judge was correct to conclude that Diveva's lost opportunity to successfully participate in two future tender processes was compensable as a probable result of a breach of contract by the Council. But for the Council's conduct, which the Council accepted was "wrong-headed", about the Ocean Drive works, the option would have been successfully exercised and there is every reason to think that Diveva would have had a good chance of success in at least the next two tender processes.
Diveva's long and successful incumbency meant, at least, that it had an intimate knowledge of the Council's asphalting requirements, that it had all of the appropriate plant and equipment to successfully perform its obligations under the putative Council contracts and that its business operations were suitable to successfully performing those obligations, as Mr Mullins' damages report showed. The absence of oral evidence from Diveva about plans to tender for future contracts in a hypothetical world, absent the Council's breach of contract, does not detract from the primary judge's reliance on all of the evidence before him including contemporaneous documents to determine, on the balance of probabilities, that Diveva would, absent the breach, have successfully participated in those tenders. Despite the Council's attempt to distinguish this case on its facts from Amann Aviation, this case is sufficiently similar to it to support the primary judge's findings that the loss of the chance of renewal of future contracts to this incumbent was compensable.
Rejection of the Council's submission that Diveva had failed to prove that there would not have been a termination by the Council during the option period did not involve a reversal of the onus of proof. The Council's reliance on the principle recognised in cases such as The Mihalis Angelos is here misplaced. Absent the "wrong-headed" conduct of the Council about Ocean Drive, it would be wrong to assume that the Council would have acted against its own interests and obligations by, for example, terminating on 30 days' written notice (as the Council submitted it was able to do) or by declining to accept Diveva's tender for a further contract. It would have been against Council's interests as it would have involved the loss of a valued contractor, the wasted expenditure of a further tender and the possibility that important asphalting works for which Council was responsible would be delayed. Absent the "wrong-headed" conduct, which can be put to one side for this purpose, there is no reason to think the Council would have, in the words of Diplock LJ in Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 at 295-296 "cut off its nose to spite its face".
The Council's submission that Diveva could not have performed future contracts due to the subsequent sale of assets fails on the facts. Those facts are that the sale of part of Diveva's business related to heavy patching and stabilising, not asphalting.
The Council's submissions about causation and remoteness of damage are inconsistent with Amann Aviation at 91 - 92. But for the wrong-headed conduct of the Council which led to its repudiation of the 2011 agreement there is every reason to conclude that Diveva would have continued with that agreement and participated in future tenders. Further, as I have found, the primary judge was correct to conclude that the prospect of renewals of the contract to Diveva may reasonably be supposed to have been in the contemplation of the parties to the agreement and thus not too remote.
Ground 3(c) should be rejected.

[22]

Ground 3(d) - consideration

While it is true that the reasons given by the primary judge for awarding damages on the basis of an 80% chance on the first renewal, a 60% chance on the second renewal and no chance of renewal in the third and fourth periods were brief, in my view those reasons were sufficiently cogent to sustain those findings and no error has been shown.
The primary judge found that over a period of nine years, Diveva and the Council had an "harmonious" relationship. The objective evidence about the strength of that relationship, found in minutes of the Council at the time of the 2011 tender, was properly taken into account by his Honour. The sole basis for the change in that relationship was the dispute arising about the 2012 Ocean Drive works. Prior to that dispute there was no suggestion that Council was considering altering or terminating the commercial relationship that it had enjoyed with Diveva. As I have said, the primary judge found that the Council's breach of contract in repudiating the agreement by failing to accept Diveva's exercise of the option was so closely bound up in the circumstances of Council's erroneous belief that Diveva had breached the 2011 agreement by its conduct of the Ocean Drive works as to be indistinguishable. That may be demonstrated by the Council's letter dated 11 March 2013 which explicitly linked the incorrect specification issue with its repudiation of the 2011 agreement. No error has been shown in that finding.
When assessing the loss of a chance for Diveva to succeed in subsequent tender processes it was appropriate for the primary judge to posit a counterfactual world in which there was no breach of contract by the Council, and thus, on his Honour's findings, no incorrect assertion by the Council that Diveva had breached the 2011 agreement.
It was thus appropriate to assess Diveva's chances on the basis that, as the primary judge found, on the balance of probabilities, but for the Ocean Drive dispute, which led to the repudiation to the contract by the Council, there was a strong likelihood that the Council would have entered into a further contract with Diveva following the successful exercise of the option.
Such future-looking damages awards necessarily involve an element of speculation. Such was the case with the award of damages to the disappointed contestant in the beauty contest the subject of Chaplin v Hicks [1911] 2 KB 786. The primary judge, doing the best he could on the evidence before him, assessed Diveva's chances in the next tender process as an 80% chance. No error has been shown in that approach. By reason of the "harmonious" history of dealings between the parties for many years, with the sole exception of the events that led to the breach of contract by the Council in 2012, his Honour did not err in assessing the chances of Diveva being successful in the next tender, as it had been in the previous three Council tenders, as 80%.
Necessarily, the tender after that involved an even greater degree of uncertainty and his Honour correctly found that in that period the chance of a renewal of the agreement was attended by an increased level of risk or uncertainty. However, given the evidence of the prior relationship of the parties, his Honour found the chance of a second renewal should not be dismissed as so low as to be non-existent, and that an award of damages in respect of a second renewal period of 60% was appropriate. No error was shown in that finding.
It does not follow, as the Council submitted, that the later renewal periods were "more certain" as the prior relationship, by the time of those later renewal periods, would be longer. Incumbency is only one matter the primary judge took into account. There were many other factors which potentially affected Diveva's chances of success the further in the future the putative tender was held. It was not "illogical" for the primary judge to find that Diveva's chances of success in the second renewal period were less certain than in the first period and that the chances of success rose no higher than speculation in the third and fourth periods.
Ground 3(d) should be rejected.

[25]

Consideration of ground 4

Rule 42.34 reserves to the primary judge an ultimate discretion to award costs in circumstances where a party would otherwise be entitled to an order for costs but obtained a judgment for less than $500,000. The Council's challenge to the primary judge's conclusions on UCPR r 42.34 is a challenge to his Honour's exercise of discretion. The parties accepted that House v The King (1936) 55 CLR 499 error needed to be shown. In my view it was not.
This was a sufficiently complicated case to warrant being commenced and continued in the Supreme Court. In particular, the expert engineering evidence about the failure of the Ocean Drive works (and the role of in situ voids) was central to the dispute between the parties. His Honour was justified for that reason alone in concluding that the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted.
In addition, the evidence obtained by Diveva from an experienced damages expert, Mr Mullins, indicated damages in an amount far greater than the District Court threshold. While it is true that by refinement of the calculations of damages by Mr Mullins the amount claimed ultimately fell below that threshold, his Honour was entitled to conclude that the continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted. In my view, the assessment of damages undertaken by Mr Mullins was not one the directors or managers of Diveva could have undertaken themselves. His reports demonstrate the construction of a damages model using both "business inputs" and the application of his specialist expertise, for example, in the selection and use of appropriate discount rates. Having regard to the expert evidence led in this case it is not in my view correct to assert that the revised assessment of loss (taking the amount below $500,000) was something that Diveva should always have known.
No House v The King error has been shown in the exercise of his Honour's state of satisfaction that costs should be awarded as the commencement and continuation of the proceedings in the Supreme Court, rather than the District Court, was warranted.
Ground 4 should be dismissed.

At a glance

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Judgment (27 paragraphs)

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Legislation Cited (2)

Cases Cited (21)

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