Thiess Contractors (NZ) Ltd v Howtrac Rentals Pty Ltd [2002] VSCA 195

5. On 3rd July 1997 Mr Sparkman of Thiess sent a fax to Mr Howard of Howtrac setting out the major plant that Thiess believed it would require, including a number of dump trucks. Mr Howard replied five days later and negotiations began. They ultimately led to Howtrac's hiring six 773B dump trucks to Thiess, which were delivered to the Matahina Dam site during September and October 1997. Although it was originally envisaged that the period of hire might extend to 25th November 1998, it came to an end by mutual agreement on or about 20th October 1998. In the proceeding below Howtrac sued for various amounts said to be due in respect of the hire of the trucks and Thiess counterclaimed for damages for breach of contract. Judgment was given in the Trial Division on 22nd December 2000.

8. Only part of that judgment is complained of in the notice of appeal. The agreement between the parties drew a distinction between "working hours", to be paid for at the rate of $95 per hour, and standby hours, to be paid for at the rate of $60 per hour. Howtrac contended that it was entitled to be paid for all the standby hours recorded during the period of hire, less an adjustment to which I shall refer later.[1] Thiess contended that standby hours were relevant only in determining monthly payments during the period of hire, to ensure that, even if the trucks were idle, Howtrac was paid for a minimum of 250 hours per month per unit[2]. There was a guaranteed minimum of 21,000 working hours. As that was not achieved, Howtrac was entitled to $1,995,000 (21,000 x 95) but no more. The learned judge upheld Howtrac's contention. The judgment given in its favour included a component of $701,417.40 on account of standby charges together with interest on that amount. Thiess seeks, in effect, to have the judgment varied by omitting that component.[3]

11. There are two main issues. The first concerns the composition of the contract between the parties. Howtrac pleaded that the contract was partly written and partly to be implied from documents, trade usage and custom, operation of law and the need to give the agreement business efficacy. Thiess pleaded that the contract was partly written, partly oral and partly to be implied from conversations, trade usage and custom and the need to give the agreement business efficacy. The conversations relied on were conversations between Mr Howard and Mr Sparkman. The judge made adverse findings as to the latter's credit and, on appeal, both parties concentrated on the documents. They did not, however, agree on which documents composed the contract.

14. Mr Karkar took us through the correspondence beginning with the faxes to which I have already referred. He submitted that that correspondence culminated in an immediately enforceable contract no later than 8th August 1997, when Mr Howard sent Mr Sparkman a fax reading:

"We reference your facsimile from Trawool and accept payment terms and methodology outlined in your schedule. Accordingly, we now believe that the matters outlined in the various correspondences are resolved and agreed. We are making tentative arrangements to attend site on Tuesday for an inspection prior to finalisation of our agreement. We would be pleased to receive your confirmation by way of a letter of intent pending further formal documentation and your advice of any other matters that we should consider."

18. Counsel argued that the terms of the contract had been progressively agreed in the course of the negotiations and that, notwithstanding the reference to formal documentation in the last paragraph of that fax, the parties had reached an agreement of the first kind described by Dixon, C.J., McTiernan and Kitto, JJ. in Masters v. Cameron[4], when their Honours said:

"Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract."

22. I do not accept that submission. The parties had not reached finality in arranging all the terms of their bargain. In the first place, whilst it is true that terms had been progressively agreed in the course of the negotiations, the fax did not say that all matters had been agreed but only the matters outlined in the correspondence. Secondly, Mr Howard was to inspect the site "prior to finalisation of [the] agreement". Even if the fax stopped there, I should not read those words as referring only to the engrossment of a formal document which might be fuller or more precise but not different in effect. I should understand the inspection as a necessary and prudent step prior to becoming bound. But the fax did not stop there. The last paragraph requested a letter of intent and expressly referred to the possibility of "other matters" that the parties should consider. There is no reason to confine them to matters of drafting or detail.[5]

25. His Honour found, correctly in my opinion, that the parties did not finalise their contract until 21st August 1997 and that its terms were to be collected from the documents comprising Exhibit PL1 and, for the most part, from a fax of 19th August 1997 from Mr Howard to Mr Prater of Thiess as amended in handwriting by Mr Prater. It will be as well to look at that document before referring to the other documents comprising the exhibit.

28. The first page of the fax of 19th August 1997, as amended by Mr Prater, read in part:

"We refer to your Plant Hire Order No 83301. Following a visit to the site of the works, supplementary discussions with yourself and site personnel, we herewith confirm the terms and conditions under which the hire arrangements will operate between Thiess and Howtrac. * Equipment supply: 6 No 773B Dump Trucks * Hire rate: $95 AUD/working hr (Keinzle measure) $60AUD/standby hr * Minimum Guaranteed 21,000 working hours aggregate Hours of Hire: based on 4 trucks Ex Japan being delivered to site prior to the end of September and the final two trucks by 15 Oct. * Period of hire: 25th September 1997 to 25 November 1998. * Payment Terms: 30 days from the end of the month of invoice and as detailed in special conditions attached."

32. It is unnecessary to set out the rest of that page or the next page. It is sufficient to mention two points. First, Mr Howard noted Howtrac's acceptance of "the terms noted in your correspondence under 'obligation of owner'". Secondly, there was a paragraph to the effect that, if a spare truck were "placed on site to ensure high availability", the aggregate minimum hours guaranteed would remain unchanged, but the costs of establishment and disestablishment would be noted for the main trucks, set out in the special conditions which had already been mentioned under the heading "Payment Terms".

35. The special conditions, omitting terms which neither party suggested were relevant and emending four typographical errors and the layout of the table, read:

"SPECIAL CONDITIONS

* Minimum paid hours per month per unit is 250 hours or Keinzle clock hours, whichever is the greater. * Standby hours paid at $60/hr only * Working hours paid at $95/hr * Example of monthly payment calculations and treatment of standby hours prior to achievement of minimum aggregate hours.

* Minimum guaranteed hours for all units 21,000 Keinzle hours subject only to availability of trucks by Howtrac. To achieve these total hours units will need to be available for a minimum of 100 hrs work per week (6 days, 2 x 10 hour shift). Total hours to be available within 14 months starting 25th September 1997 and completing no later than 25th November, 1998.

...

Plant will not be paid for when plant broken down and/or not available to work.

..."

41. The other documents in Exhibit PL1 were Mr Howard's fax prior to amendment by Mr Prater, about which nothing more need be said; a fax from Mr Howard to Mr Prater responding to those amendments; a fax of 21st August 1997 from Mr Prater confirming agreement with all the substantive points made by Mr Howard in that response; and the plant hire order referred to above.[6] The standard conditions annexed to the plant hire order stipulated that no standby rates of hire should be payable by Thiess unless specified in the order, but the order specified $95 per hour as the rate for working hours and $60 per hour as the rate for standby hours.[7] It is unnecessary to summarize the provisions under "obligation of owner" referred to in Mr Howard's fax. They have no bearing on the issues to be resolved on this appeal.

44. The second main issue relates to the construction of the contract and its effect in the events that happened. The minimum guaranteed hours of hire were 21,000 working hours. In fact the hours worked by the six trucks totalled only 19,714.28 working hours. There were 12,976.01 standby hours, as calculated by Howtrac based on a shift of 9.83 hours.[8] Howtrac claimed payment for 21,000 working hours at $95 per hour plus 11,690.29 standby hours at $60 per hour. The standby hours were calculated by subtracting the difference between 21,000 and 19,714.28 from 12,976.01. Thiess contended that Howtrac was entitled to receive payment for 21,000 hours at $95 per hour and no more.

47. The essential difference between the parties is as follows. Howtrac contends, and its contention was accepted by the judge, that the contract clearly provides that standby hours will be paid for at the rate of $60 per hour, that the table in the special conditions is concerned only with the regime for monthly payments prior to achievement of minimum aggregate hours and that there is no inconsistency between the way in which standby hours are used in the table and Howtrac's claim to be paid for standby hours at the end of the term. It concedes that it is not entitled to be paid for the difference between 21,000 and the number of actual working hours plus all the standby hours and that there must be an adjustment as described in [13] above. Thiess contends that standby hours, and the rate for standby hours, were agreed only for the purpose of the table. There is no dispute as to the meaning of standby hours. The dispute is as to the function of standby hours in the agreement.

50. Before considering the arguments further it will be useful to summarize the way in which the parties agree that the table in the special conditions is to be understood:

* Howtrac is to be paid for a minimum of 250 hours per month per unit. Working hours are to be paid for at the rate of $95 per hour and standby hours at the rate of $60 per hour.

54. In the first month the hours worked by a particular truck total only 200. Howtrac is entitled to be paid for those 200 hours at $95 per hour and, to make the total up to 250 hours, is also entitled to be paid for 50 hours at the standby rate.

* In the second month the truck works 250 hours. There is no need for any make up. Howtrac is paid for those hours at the working rate.

* In the third month the truck works more than the minimum 250 hours. Prima facie Howtrac is entitled to be paid for all those hours at $95 per hour, but Thiess is allowed a credit for the 50 standby hours at $60 per hour that it paid for in the first month to make the hours up to the minimum of 250.

* In the fourth month the truck works 350 hours. Howtrac is paid for all those hours at the working rate. Thiess is not allowed a credit, because there are no longer any standby hours for which it paid in a previous month that have not already been credited to it. It does, however, acquire a credit of 100 hours.

* In the fifth month the truck again works only 200 hours. Howtrac is entitled to be paid for those hours at the working rate and, as we saw in the first month, would be entitled to be paid for a further 50 hours at the standby rate. But it is not paid for those 50 hours. Thiess draws on the credit of 100 hours that it acquired in the fourth month.

* In the sixth month Thiess acquires a further 100 credit hours. In the fifth month it used 50 of the 100 credit hours acquired in the fourth month. Accordingly it carries forward a credit of 150 hours, to be used as and when working hours fall below the minimum of 250 hours.

62. In the bullet point immediately preceding the table, "minimum aggregate hours" means 21,000 working hours. That is expressly provided under the heading "Minimum Guaranteed Hours of Hire" on the first page of the fax and it is reinforced by the fact that the first bullet point after the table specifies the minimum guaranteed hours as 21,000 Keinzle hours, for a Keinzle clock measures the time when a truck is actually moving. The table shows the treatment of standby hours not until 21,000 hours have been achieved but until 21,000 working hours have been achieved.

65. Mr Golvan submitted that the natural meaning of the agreement was that Howtrac would be paid $95 for each working hour and $60 for each standby hour with a guarantee that at least 21,000 hours would be working hours and that its cashflow would be protected by the stipulation of a minimum of 250 paid hours per month per unit. Although he did not use the expression, he submitted, in effect, that Thiess's construction makes the tail, i.e. the special conditions, wag the dog.

68. Mr Karkar submitted that the table in the special conditions showed the function of standby hours in the agreement. Moreover the table was expressly said, in the immediately preceding bullet point, to be an example of monthly payment calculations and treatment of standby hours prior to achievement of minimum aggregate hours. Once minimum aggregate hours were achieved, or paid for, standby hours had no further function. Mr Golvan responded, as the judge had done, by saying that there was no inconsistency between using standby hours, in accordance with the table, as part of the mechanism for securing a minimum cashflow to Howtrac prior to the achievement of 21,000 working hours and paying for other standby hours at the conclusion of the contract.

71. The figure for "[m]inimum paid hours per month per unit" (250) is derived by dividing the number of "minimum guaranteed hours for all units" (21,000) by the number of trucks (6) and the number of months of availability (14). In other words, 250 x 6 x 14 = 21,000. There is evidently intended to be a close relationship between the minimum 21,000 working hours for which Howtrac is to be paid and the monthly payments to be made in accordance with the table.[9] In my opinion that relationship, together with the way in which "credit hours" are dealt with in the table, shows that Mr Karkar's submission is correct.[10]

74. I was initially troubled by a number of features in the table. One was that it applies "prior to achievement of minimum aggregate hours", with the apparent result (until the table is understood) that, if the work proceeded slowly but 21,000 hours were eventually worked, Howtrac would be paid for many standby hours but, if the work proceeded speedily and 21,000 working hours were achieved in (say) eight months, Howtrac would be paid for no standby hours. Another feature of the table was that a comparison between the third and fifth months shows that, although Thiess is given credit only for the additional hours it paid for at the working rate, it is given credit only for the additional dollars it paid when payment was made at the standby rate. A further feature of the table was the absence of any provision to the effect that one standby hour is to count as 60/95ths of one of the minimum working hours that are to be achieved.

77. Further reflection on the table has persuaded me that those are not troubling features at all. Indeed the fact that Thiess is given credit for additional hours paid for at the working rate but additional dollars when the payment was made at the standby rate is the key to understanding the table and the function of standby hours. There is, in turn, no anomaly in payments for standby hours ceasing when minimum aggregate hours are achieved or in the omission of a provision to the effect that one standby hour is to count at 60/95ths of one of those 21,000 working hours.

80. It may be unfortunate that the figure 50 appears in the column headed "Credit Hours" in the third month, for the column headed "Payment Per Month" shows that the contract is not at that stage concerned with credit hours but with credit dollars. Thiess is not excused from paying for 50 of the 300 working hours in the third month: it is simply credited with the $3,000 it paid for 50 hours at the standby rate in the first month. The result is that, over the three-month period, Howtrac receives payment for 750 working hours at $95 per hour and no more. There was no independent entitlement to be paid for standby hours. The 50 standby hours in the first month were paid for solely as a stop-gap to protect Howtrac's cashflow until an additional 50 working hours had been achieved. The credit acquired by Thiess in the fourth month is quite different. The fact that 350 hours were worked in that month does not mean that there is a $9,500 credit to draw on. It means that Thiess is ahead by 100 working hours and can use 50 of those hours when it falls behind in the fifth month. Once Thiess pays for 21,000 working hours, standby hours have no further part to play and the dollars paid for them up to that time will have been credited to Thiess in the same way as the $3,000 were credited in the third month.

83. The agreement must be read as a whole. The table in the special conditions may be used to assist in understanding the significance of the two hire rates set out on the first page of the fax.[11] The way in which "credit hours", including credit dollars, are dealt with in the table militates against Howtrac's construction. Why should Thiess be credited with $3,000 in the third month only to have to pay it back again at the end of the agreement? More fundamentally, if the table is solely to secure a minimum cashflow, why are working hours not treated in a similar way so that Thiess does not have to pay for excess working hours until the end of the agreement? The table shows that it must pay for all 350 hours worked in the fourth month, not 250 hours with a credit of 100 to be applied in the future as and when working hours fall below 250. On Howtrac's construction, payment for excess standby hours is deferred until the end of the agreement but it is not suggested that payment for working hours in excess of 21,000 is similarly deferred.

86. Those conclusions make it unnecessary for me to consider Mr Karkar's supporting and subsidiary arguments. I should make it clear, however, that I have not allowed myself to be influenced by the parties' correspondence in the course of their negotiations or by Howtrac's correspondence with its financier. Mr Karkar's submission was that, because there was an immediately enforceable contract no later than 8th August 1997, that contract could be used to construe the final agreement.[12] I have rejected the submission that there was such a contract. Moreover, if the function of standby hours in the agreement is ambiguous, it is not the kind of ambiguity that can be resolved by reference to previous negotiations, as in a case where the parties refer to "the land we have been discussing" or "your wool".[13] The general rule explained by Mason, J. in Codelfa Construction Pty. Ltd. v. State Rail Authority of New South Wales[14] applies.[15]

89. For these reasons I do not accept that the natural meaning of the agreement is as Mr Golvan contended, nor do I accept an argument for the respondent based on what was said to be commercial reality and business common sense. It was concisely stated in the learned judge's reasons[16] as follows:

"The minimum 21,000 working hours could have been achieved within an eight months' period. If the reasonable bystander had put a question to the contracting parties on 12 August 1997 that if the works progressed for eight months without interruption and then there was a period of some two months during which the plant was rarely used, would it be expected in those circumstances that Howtrac would be paid standby? In my opinion the parties acting reasonably at that time would have both answered in the affirmative. Both expected the works to continue without interruption and both could not deny the possibility of an interruption which may be substantial which would affect Howtrac's ability to derive income from the hire of its plant. These large trucks were sent to New Zealand. Howtrac's business is located in Victoria. It would hardly be in its commercial interest to not expect to be paid standby time when its trucks were standing idle for extensive periods of time. It is not as if it could take back the trucks and re-hire them for a short period to someone else. "

93. The argument was developed by counsel for the respondent in their outline of submissions. Counsel wrote:

"The payment regime was to ensure payments were made each month at minimum levels. But this was not inconsistent with a final reconciliation and full payment for standby time at the end of the job. It was never intended by the parties at the time of the agreement that there would be a large amount of standby time. The works were intended to continue without interruption. However, due to unforeseen events, particularly the necessity to alter the scope of the works, involving reshaping the right abutment requiring the removal of extra rock and excavation of rock spurs within the cut-off trench, the excavation process was considerably slowed down. As a result, in the period between December, 1997 and February, 1998 trucks remained idle for a large period of the time and were only used intermittently, even though they were still required to be made available for use. As a result, the trucks were on standby for long periods. It was to cover this kind of unexpected contingency that an entitlement to be paid for standby was clearly incorporated into the agreement. The 21,000 minimum working hours was the incentive provided to Howtrac to acquire and make the trucks available in new Zealand, not to cover risk of unforseen standby time due to events beyond the control of Thiess." (Appeal book references omitted.)

97. If the minimum 21,000 working hours were reached within eight months but the works were not completed, it is true that the trucks and personnel would have to remain on site, but Howtrac would have achieved its minimum objective in record time. It would be even better if the works were concluded and the trucks could be rehired and the personnel redeployed, but Howtrac promised to make them available for 14 months. If the works were completed within eight months, enabling Howtrac to redeploy the trucks and personnel, that would be Howtrac's good fortune. I do not accept that the 21,000 minimum working hours had the limited function of providing an incentive to Howtrac to acquire the trucks and make them available in New Zealand. That cannot be collected from the contractual documents and, if Howtrac were entitled to be paid for standby hours as such, and not simply on the temporary basis exemplified in the table, one would not expect either a credit for standby in a month like the third month or the deferral of payment until the end of the agreement.

100. Mr Golvan pointed out that the words "as detailed in special conditions attached" appeared only under the heading "Payment Terms" on the first page of Mr Howard's fax of 19th August 1997 and that the standby rate is referred to as a "hire rate" and not, for example, as a "make up rate". As to the first point, the words on which counsel relied appear to be a reference not to the table but to the last page of the fax, which I have not set out but which was headed "Payment Terms". It dealt with incidental matters. As to the second point, the table does not provide for automatic make up payments but for additional hours up to 250 to be paid for, at the standby rate, if a unit is available. That is the significance of the term that "[p]lant will not be paid for when plant broken down and/or not available to work", which, as counsel for the respondent submitted, could be relevant only in relation to

104. As subsequent conduct cannot be used to construe the contract,[18] I find it

unnecessary to refer to Thiess's correspondence with the Electricity Corporation of New Zealand.

108. I would allow the appeal and hear counsel on the precise form of the order. Its effect should be to vary the judgment given below by omitting the component for standby charges and interest on that amount. Attention may need to be given to interest on the balance of the judgment and the orders that were made when a stay was granted on 2nd February 2001.

113. I agree for the reasons stated by Callaway J.A. that the appeal should be allowed and the judgment below varied by omitting the component for standby charges and interest on that amount.

118. I agree, for the reasons advanced by Callaway, J.A., that the appeal should be allowed and that the orders proposed by his Honour be made.

[2] There was a further limitation, "prior to achievement of minimum aggregate hours", which did not apply, because the minimum was not achieved: see the table in [11] and [13] below.

[3] The notice of appeal does not expressly refer to the statutory interest but it is obviously meant to be included. The "orders sought" part of the notice asks that the judgment in respect of Howtrac's entitlement to standby charges be set aside and in lieu thereof it be adjudged that Howtrac was not entitled to any of the standby charges which it claimed. No declaration having been sought in the pleadings, variation of the judgment would be sufficient.

[4] [1954] HCA 72; (1954) 91 C.L.R. 353 at 360.

[5] That being so, it is unnecessary to decide the significance of Mr Golvan's submission that Thiess's argument as to the composition of the contract had been significantly different at trial.

[6] See the first sentence of the extract from Mr Howard's fax set out at [9].

[7] The standard conditions also included an "entire agreement" clause. Mr Golvan referred to that clause but, in the light of the conclusion I have reached as to the composition of the contract, it is unnecessary to consider it.

[8] There was a dispute as to that mode of calculation, but the judge accepted Howtrac's calculation and it is no longer challenged.

[9] Neither side attached importance to the fact that the table applies to each unit and not to all six units, so that, for example, there is no credit if one truck works for 260 hours and another truck for 240 hours.

[10] The relationship is part of the essential background. It is the way in which "credit hours", including credit dollars, are dealt with that is important.

[12] Reference was made to Lewison, The Interpretation of Contracts (2nd ed 1997), s2.05; Squarey v. Harris-Smith (1981) 42 P. & C.R. 118 at 129 and Ladbroke Group Plc v. Bristol City Council [1988] 1 E.G.L.R. 126 at 128.

[13] Cf. Macdonald v. Longbottom [1859] EngR 635; (1859) 1 El. & El. 977; 120 E.R. 1177.

[14] [1982] HCA 24; (1982) 149 C.L.R. 337 at 352.

[15] As it would not alter my conclusion in this case, I leave for another day the significance of terms being progressively agreed.

[17] It is unnecessary to consider what the position would have been if plant had been broken down and/or not available to work for such long periods that it was not reasonably practicable for Thiess to achieve 21,000 working hours.

[18] FAI Traders Insurance Co. Ltd. v. Savoy Plaza Pty. Ltd. [1993] VicRp 76; [1993] 2 V.R. 343 and Ryan v. Textile Clothing & Footwear Union of Australia [1996] VicRp 67; [1996] 2 V.R. 235 at 237-238 and 261-262.