Velvet Glove Holdings Pty Ltd v Mount Isa Mines Ltd [2011] QCA 312

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS - where appellant entered into contract to make available to the respondent accommodation units and other facilities for a period of 12 months - where respondent agreed to pay for the "Services" provided by the appellant in accordance with the contract - where contract provided for payment of a "Contract Price" and "Reimbursement Expenses" - where pursuant to cl 18.5 the contract was terminable at discretion of respondent - where respondent exercised right of termination under cl 18.5 - whether, upon termination, the balance of "Contract Price" was payable - whether amounts became due from time to time as progress claims were advanced - whether amount payable to the appellant was the total amount payable had the contract run for 12 months - whether that amount was due upon entry into contract

CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - CONSTRUCTION AND INTERPRETATION OF CONTRACTS - INTERPRETATION OF MISCELLANEOUS CONTRACTS AND OTHER MATTERS - where appellant sought to adduce evidence relating to communications between the parties before the contract was executed - where appellant submitted the evidence was admissible evidence of the context in which the parties reached agreement - whether the trial judge erred in ruling that the evidence was inadmissible

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON AN INDEMNITY BASIS - where costs were assessed on an indemnity basis - whether there was an element of unreasonableness displayed by the appellant in refusing a Calderbank offer so as to warrant an order that costs be paid on an indemnity basis

Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; [1986] HCA 32, cited

Byrnes v Kendle (2011) 85 ALJR 798; [2011] HCA 26, applied

Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24, applied

Colgate Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225; [1993] FCA 536, cited

Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158, cited

Franklins Pty Ltd v Metcash Trading Ltd (2009) 76 NSWLR 603; [2009] NSWCA 407, cited

Halzeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298, applied

International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151; [2008] HCA 3, cited

Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896; [1997] UKHL 28, cited

L Schuler AG v Wickman Machine Tool Sales [1973] 2 WLR 683; [1973] 2 All ER 39; [1973] UKHL 2, cited

Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd (2006) 156 FCR 1; [2006] FCAFC 144, cited

Masterton Homes Pty Ltd v Palm Assets Pty Ltd (2009) 261 ALR 382; [2009] NSWCA 234, cited

McCann v Switzerland Insurance Australia Limited (2000) 203 CLR 579; [2000] HCA 65, cited

North v Marina [2003] NSWSC 64

O'Dea v Allstates Leasing System (WA) Pty Ltd (1983) 152 CLR 359; [1983] HCA 3, cited

Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; [2004] HCA 35, cited

Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64, cited

Ralph v Diakyne Pty Ltd (ACN 099 168 402) [2010] FCAFC 18, cited

Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, cited

Rivat Pty Ltd v B & N Elomar Engineering Pty Ltd [2007] NSWSC 638, cited

Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 240 CLR 45; [2002] HCA 5, applied

Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596; [1979] HCA 51, cited

Sirius International Insurance Co v FAI General Insurance Ltd [2004] 1 WLR 3251; [2005] 1 All ER 191; [2004] UKHL 54, cited

Taylor v Johnson (1983) 151 CLR 422; [1983] HCA 5, cited

The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111, cited

Thiess Services Pty Ltd v Mirvac Queensland Pty Ltd [2005] QSC 364, cited

Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52, applied

Wesoky v Village Cinemas International Pty Ltd [2001] FCA 32, cited

**[1] FRASER JA: I have had the advantage of reading the reasons for judgment of Philippides J. I agree with those reasons and with the orders proposed by her Honour.

[2] WHITE JA: I have read the reasons for judgment of Philippides J and agree with those reasons and the orders proposed by her Honour.

[3] PHILIPPIDES J: The appellant, Velvet Glove Holdings Pty Ltd ("Velvet Glove"), which was the plaintiff at first instance, appeals from the decision of the learned trial judge dismissing its claim against Mount Isa Mines Ltd ("MIM") for moneys due and owing under a contract between the parties or, alternatively, damages for breach of contract.**

**[4] By a "Contract for Recurring Services" dated 15 August 2008, the parties entered into an agreement pursuant to which Velvet Glove agreed to provide certain "Services" as defined in the contract to MIM on a periodic basis in return for payment in accordance with the contract.

[5] The "Term" of the contract was defined to be one year and the commencement date for the provision of the Services was specified as 30 August 2008. Velvet Glove owns the Moondarra Caravan Park near Mt Isa. The term "Services" was defined as comprising "Rental of 144 Accommodation Units at Moondarra Caravan Park as set out in schedule 2". Schedule 2 cross-referred to Sch 5 which relevantly made it clear that the Services also encompassed the provision by Velvet Glove to MIM of:**

(a) rental of 144 accommodation units at Moondarra Caravan Park whether occupied or not;

(c) laundry facilities of one machine per 10 people.

**[6] The contract made provision in cl 11 for the payment of a "Contract Price" and "Reimbursable Expenses".

[7] The term "Contract Price" was defined by reference to Sch 5 which provided for a total rental price for 365 days rental at $99 per night of $5,203,440. Schedule 5 made it clear that the obligation to pay applied "whether [the 144 units were] occupied or not". The contract obliged MIM to pay the Contract Price "in accordance with this Contract": cl 2.1(b) and cl 11.1(a). Provision was made for a mechanism for progress payments to be made during the currency of the contract (cl 11.2).

[8] The contract contained a "termination for convenience" provision in cl 18.5, by which MIM had an absolute discretion to terminate it on 10 business days' written notice to Velvet Glove. MIM exercised its right to terminate pursuant to cl 18.5 by letter dated 3 December 2008. Both parties acknowledge that the termination was effective. It was common ground at the trial that at the time of termination MIM had paid $1,767,744 to Velvet Glove.

[9] The central issue at trial was the amount payable to Velvet Glove in the circumstances. Clause 18.5 provided the mechanism (cll 18.5(d)(i)-(vi)) by which the amount payable to Velvet Glove was to be calculated in the event that the contract was terminated pursuant to that clause. On 2 February 2009, MIM issued an "Approved Contractor's Claim Form" purporting to determine, pursuant to clause 18.5(d) of the contract, that the amount payable to Velvet Glove was $71,280 plus GST (a total of $78,408). On 18 August 2009, Velvet Glove accepted that amount without prejudice to its rights under the contract.

[10] Velvet Glove brought a proceeding for two discrete claims. One was for "Reimbursable Expenses" of $1,516,365.56 (including GST) which was settled prior to trial for $770,000, inclusive of GST, interest and costs.

[11] The other claim which proceeded to trial was for $3,275,543.97 (which was the unpaid balance of what the "Contract Price" would have been had the contract run for the full 12 months (and GST)). That claim was advanced as a claim for moneys due and owing under the contract, or alternatively as a claim for damages for breach of contract. The claim was particularised as follows:**

Less: Part payment 18/08/2009 (inclusive of GST) $ 78,408.00

plus interest at 10 per cent per annum from 27 February 2009 ($987.15 per day).

[12] The learned trial judge ruled that extrinsic evidence which was sought to be admitted as evidence of the context in which the parties reached their agreement was inadmissible. Her Honour dismissed Velvet Glove's claim in its entirety and awarded costs on an indemnity basis in MIM's favour.

**[13] The parties utilised a standard form contract headed "Contract for Recurring Services", being number 11003402, and entitled "Rental of 144 Accommodation Units at Moondarra Caravan Park". It identified MIM as the "Principal" and Velvet Glove as the "Contractor".

[14] "Contract" was defined in cl 1.2 as meaning "this period contract for services including the schedules and annexures, and any other document or materials incorporated by reference". The contract contained an "entire agreement clause" which specified:**

This Contract, the Accreditation Agreement and any confidentiality agreement contain the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by these documents and has no further effect."

(a) The terms and conditions of the Accreditation Agreement, including the Principal's Site Procedures, are incorporated by reference in, and are taken to be part of, this Contract.

(b) In the event of any inconsistency between any [of] the following documents, they take precedence over each other in the following descending order:

(i) schedule 1, Additional Conditions to this Contract;

(ii) the General Terms and Conditions of this Contract;

(iii) schedule 2 to 8 to this Contract in the order in which they appear; and

(iv) the Accreditation Agreement."

**[16] Her Honour noted that there were no documents incorporated by reference into the Contract for Recurring Services. There was no "Accreditation Agreement" and so the references to it were irrelevant. Her Honour rejected an argument that the contract comprised, in addition to the contract document, certain documents accompanying the contract when it was delivered to Velvet Glove for execution, observing that none was contractual in character or intent and that in respect of the Letter of Intent, it contained an express acknowledgment that the parties were still negotiating the terms of their agreement. Her Honour thus found that the contract consisted only of the document styled "Contract for Recurring Services Contract No. 11003402".

[17] It is necessary to set out the pertinent provisions in some detail. In passing, I note that by cl 1.3, which concerned rules for interpreting the contract, it was provided that, "Headings and catchwords are for convenience only, and do not affect interpretation".

1. The Principal requires the provision of the Services on a periodic basis.

1. The Contractor has agreed to carry out the Services in accordance with this Contract."

[19] The parties' fundamental obligations were stated in cl 2.1 as follows:

(a) The Contractor must provide the Services to the Principal on the terms set out in this Contract.

(b) The Principal must pay for the Services in accordance with this Contract."

The Contractor's obligation to provide the Services

[20] The Schedule of Particulars provided[1] (inter alia):

"Services The Services comprise Rental of 144 Accommodation Units at Moondarra Caravan Park as set out in schedule 2.

Date of the The facility shall be fully operational by 30th August

(a) The Contractor must execute the Services in accordance with the requirements of the Contract.

(b) The Contractor acknowledges that the Services includes all work:

which is otherwise necessary or desirable for the proper execution, Completion and proper performance of the Contractor's obligations under this Contract."

**[22] "Scope of Services" was not defined but the "Scope of Work" was defined in Sch 2 by cross reference to Sch 5 (for which see below).

The Contractor must perform the Services from the Commencement Date for the Term in accordance with the instructions of the Principal's Representative.

[24] By cl 1.2 "Program" is relevantly defined as the program in Sch 4 which provided:

The facility shall be fully operational by 30th August 2008 which is five (5) weeks after signing the Letter of Intent on 28th July 2008.

[25] As her Honour noted at [23], both parties knew that Velvet Glove would have to undertake construction works before it could provide the Services. The provision of the Services was to commence on 30 August 2008.

**[26] The Principal's "payment obligations" are specified in cl 11 as being firstly, the payment of the "Contract Price" and secondly, "Reimbursement Expenses" in accordance with the contract. It is useful to refer to the definition of the terms "Contract Price" and "Reimbursable Expenses" before turning to cl 11.

[27] The "Contract Price" is defined in cl 1.2 as follows:**

(a) where the Principal has accepted a lump sum, the lump sum set out in schedule 5;

(b) where the Principal has accepted rates, the sum ascertained by multiplying the measured quantity of an item of the Services actually executed by the Contractor by the corresponding rate in schedule 5; or

(c) where the Principal has accepted lump sum and rates, an aggregate of the sums referred to in paragraphs (a) and (b)."

The Principal shall take occupancy of the 144 accommodation units for a period of twelve (12) months at a cost of $99.00 per unit per night, as detailed in the table below, whether occupied or not.

The rooms shall not be sublet to any other party without prior consent from the Principal's Representative. Should the Principal's Representative agree to sublet the unit/s, the unit/s shall be sublet at a lower daily rate, than detailed in table 5.1. All monies received by the Contractor for the sublet of the unit/s shall be reimbursed to the Principal.

5.3 Provision of kitchen / mess suitable for one hundred (100) people.

5.4 Provision of laundry facilities - One (1) machine per ten (10) people.

[29] "Reimbursable Expenses" is defined in cl 1.2 and are distinct from the Contract Price:

"Reimbursable Expenses are the expenses payable by the Principal to the Contractor in accordance with this Contract as set out in schedule 5 which have been reasonably and properly incurred by the Contractor to third parties in carrying out the services provided that the Principal has given its prior written consent to the Contractor incurring those Reimbursable Expenses."

[30] Clause 11 specified the payment obligation of MIM as follows:

(a) The Principal must pay the Contractor the Contract Price and Reimbursable Expenses in accordance with this Contract.

(b) The lump sum breakdown, if any, in schedule 5, may be referred to by the Principal's Representative for the purposes of:

(ii) the valuation of changes to the scope of the Services pursuant to clause 6.2 to the extent that items are relevant,

(c) The Contractor acknowledges that the Contract Price includes all costs and expenses (other than the Reimbursable Expenses) it may incur in performing the Services and its other obligations under this Contract.

(a) Provided the Contractor has also complied with clause 11.2(f), the Contractor may submit to the Principal's Representative within 5 Business Days after the end of each month a payment claim in the form of the Principal's contract claim form (Contractor's Claim Form) attaching the information required by the Principal's Representative and including:

(i) details of the value for the Services executed by the Contractor to the end of the previous month;

(ii) details of any amount claimed by the Contractor's subconsultants which is the subject of a dispute between the Contractor and those subconsultants and details of the dispute; and

(iii) documentary evidence that it has incurred the Contract Price for Services performed and the Reimbursable Expenses claimed.

(b) Within 10 Business Days of receipt of a Contractor's Claim Form provided in accordance with clause 11.2(a), the Principal's Representative must determine in writing the amount payable to the Contractor pursuant to clause 11.2(c) (Approved Contractor's Claim Form).

(i) the value of the Services performed by the Contractor excluding any amounts for which the Contractor has no Entitlement and excluding the amount estimated by the Principal's Representative to rectify any defects in the Services;

(ii) the amount of any Reimbursable Expenses incurred by the Contractor with the prior written approval of the Principal's Representative;

(iii) any amounts due from the Principal to the Contractor pursuant to this Contract;

(iv) less the amounts already paid by the Principal to the Contractor in relation to the Contract and the Services;

(v) less amounts payable but not yet paid to the Contractor in relation to the Services; and

(vi) less any money which is due or which may become due from the Contractor to the Principal in respect of this Contract or the Services or which the Principal is entitled to deduct or withhold.

(e) Where an amount is due from the Principal to the Contractor in respect of a an [sic] Approved Contractor's Claim Form issued pursuant to clause 11.2(b) or 18.5(d), the Principal must pay the Contractor the amount certified as payable by the Principal's Representative under clause 11.2(b) or 18.5(d):

(ii) in all other cases, within 20 Business Days after the end of the month in which the Principal's Representative receives the Tax Invoice.

(g) Payments made by the Principal are on account only and are not:

(ii) an admission of liability on the part of the Principal.

(h) Where an amount is due from the Contractor to the Principal in respect of an Approved Contractor's Claim Form issued pursuant to clauses 11.2(b) or 18.5(d), the Contractor must, within 20 Business Days after receipt of that Approved Contractor's Claim Form, pay the Principal the amount stated in that Approved Contractor's Claim Form as due from the Contractor to the Principal."

**[31] The contract made provision by cl 18 for termination of the contract by MIM for breach by Velvet Glove (cl 18.2) and termination in the event of insolvency of either party (cl 18.3). Additionally, as already mentioned, provision was made for "termination for the convenience" by MIM (cl 18.5).

(a) Notwithstanding any other provision of this Contract:

(i) the Principal may at its sole discretion terminate this Contract by giving 10 Business Days' written notice to the Contractor; and

(A) cease the execution of the Services within the time specified in the written notice; and

(B) ensure that the Work Area is left in a safe condition and the Services are properly secured.

(b) If for any reason a purported termination under clause 18.2(b) or clause 18.3 or at general law by the Principal is held to be ineffective, the purported termination is not a breach or repudiation of this Contract and will be deemed to have been effected under clause 18.5(a).

(c) If this Contract is terminated pursuant to clause 18.5(a), the Contractor may submit a statement in a form approved by the Principal's Representative showing the value of the Services performed by the Contractor and the amount payable under clause 18.5(d).

(d) Within 10 Business Days of receipt of a statement provided in accordance with clause 18.5(c), the Principal's Representative must determine in writing the amount payable as a consequence of termination under clause 18.5(a) and issue it to the Contractor setting out that determination (and which is an Approved Contractor's Claim Form for the purposes of clause 11.2). The amount payable is:

(i) the value of the Services performed by the Contractor excluding any amounts which the Contractor has no Entitlement;

(ii) the amount of any Reimbursable Expenses incurred by the Contractor with the prior written approval of the Principal's Representative;

(iii) any amounts due from the Principal to the Contractor pursuant to this Contract;

(iv) less the amounts already paid by the Principal to the Contractor in relation to the Contract and the Services;

(v) less any amounts payable to the Contractor but not paid in relation to the Services; and

(vi) less any money which is due or which may become due from the Contractor to the Principal in respect of this Contract or the Services;

(e) Except as set out in clause 18.5(d), the Contractor has no Entitlement, including for any consequential costs, losses or damages as a consequence of termination under clause 18.5(a)."

"Entitlement includes any entitlement of the Contractor to make a claim against the Principal, or any of the agents or employees of the Principal:

(a) for any addition to, or adjustment to, the Contract Price; or

(b) to recover any loss, cost, damage or expense of any kind:

(ii) relating to this Contract or any fact, matter or thing referred to in this Contract; or

(iii) arising out of or in connection with the performance of the obligations of the Contractor pursuant to this Contract (including quantum meruit)."

[34] At trial, senior counsel for Velvet Glove submitted that the contract was a lump sum contract, and that the full amount of $5,203,440 was due upon entering into the contract. Her Honour summarised the arguments made in support of that submission at [30] as follows:

(1) There were two commercial imperatives known to both parties. Firstly, from MIM's perspective - to achieve the accommodation in a short timeframe without any up-front capital payment given that it was on Velvet Glove's land; secondly, from Velvet Glove's perspective - not to incur the capital expenditure if it did not receive a guaranteed return. (Her Honour took the view that those were matters of subjective intention not relevant to an objective interpretation of the contract.)

(2) The words "whether occupied or not" in Sch 5 were critical. They were incorporated, by reference to Sch 5, in the definition of both "Services" and "Contract Price". By cl 2.1(b) Velvet Glove was required to pay for the Services in accordance with the contract: that meant the Contract Price as defined in the agreement.

(3) MIM undertook a lump sum obligation. This was incurred at the time of entry into the agreement. There were then mechanisms for when and how the lump sum was to be paid. But there was nothing in the agreement derogating from the obligation created upon entry into it.

(4) The provision for "subletting" was a clear recognition that MIM was bound to take the accommodation units for 12 months, whether it used them or not.

(5) The subletting obligation survived the termination.

(6) That the contract could be terminated at any time was inconsistent with a daily rental.

(7) Paragraph (a) of cl 18.5 conferred a contractual power to terminate. Paragraphs (c), (d) and (e) did not purport to adjust the rights of the parties or to expunge existing obligations, but rather provided a mechanism by which the calculation was to be made. In particular, paragraph (d)(iii) was plenary in its terms.

(8) On termination MIM no longer had the right to occupy, but it still had the obligation to pay. Clause 18.5 brought MIM's future obligations to an end, but not its existing ones.

(9) There was no inconsistency between the right of termination and the obligation to pay the Contract Price if the price were a lump sum. The term of the contract and MIM's entitlement to terminate it were distinct from whatever payment obligations arose and how they arose.

[35] Senior counsel for MIM submitted that his client's obligation was to pay "in accordance with this contract" and ultimately it mattered not whether it was an obligation to pay "a lump sum" or "rates"; he submitted that insofar as it was a contract for a lump sum, it was a lump sum over time, and amounts became due from time to time as progress claims were advanced for the amount of services provided during the periods to which they related. Her Honour set out the arguments advanced on behalf of MIM at [32] as follows:

(1) MIM was obliged to pay in accordance with the terms of the contract. There were two processes for establishing the amounts due - cll 11.2 and 18.

(2) Clause 11.2 provided the mechanism of claim, certification and obligation to pay within a specified period. The payments were on account only. If the full amount in Sch 5 was not paid by the end of the 12 months, then the dispute resolution process in cl 19 applied.

(3) Thus insofar as the contract was for a lump sum, it was a lump sum over time, and amounts became due from time to time over the term of the contract as progress claims were advanced for the amount of services provided during the period.

(4) Clause 18.5 provided the mechanism for establishing the amount payable not only in the event of termination for convenience, but also in the event of ineffective termination for breach or termination for insolvency.

(5) Clause 18.5(d) provided a mechanism for establishing the value of the services performed to the date of termination: a contractor's statement, followed by a determination by the Principal's representative (akin to a certificate under cl 11.2), and an obligation to pay in 20 days, with provision for dispute resolution in cl 19.

(6) Clause 18 provided a mechanism for payment of the Services provided. If a deemed termination or a termination for convenience merely accelerated payment of the amount that would otherwise be payable at the end of the 12 month term, there would be no point in having that clause.

(7) If it had been the parties' intention that the balance of the Contract Price became immediately payable, that could have been simply said.

(8) If Velvet Glove's construction were correct, this would accelerate payment of the entirety of the Contract Price with no provision for deduction, and operate in a penal way. This would be so because it made no provision for any rebate for accelerated payment, or for any deduction of costs savings to Velvet Glove in consequence of not having to make the accommodation units available for the balance of the term, or for any deduction of rental income earned from the rental of the accommodation units to other persons during the balance of the term.

(9) The objective intention of the subletting provision was to provide (in effect) an exclusivity agreement together with a guard against unjust enrichment to Velvet Glove as a result of being paid by both MIM and some other person for occupancy of the accommodation units. It operated only during the term of the contract. It did not have any operation in the assessment of the payment to which Velvet Glove was entitled in the event of termination for convenience. It could not be construed as part of a formula to calculate damages or monetary entitlement post termination.

The trial judge's approach to the proper construction of the contract

[36] The learned trial judge proceeded on the basis that in order to determine the extent of the amount payable to Velvet Glove where MIM exercised its right of termination, it was necessary to view the contract as a whole. In interpreting the commercial contract between the parties, her Honour made reference to various established principles of construction which were set out in para [16] as follows:

(a) The intention of the parties is to be ascertained from the words of the contract, considered in the context of the purpose and object of the transaction.[2]

(b) The contract is to be construed with a view to making commercial sense of it.[3] A commercially sensible construction is more likely to give effect to the intention of the parties.[4] There is a general tendency against literalism and technical interpretation.[5]

(c) The intention of the parties is to be determined objectively: what each party, by words and conduct, would have led a reasonable person in the position of the other to believe. The subjective beliefs and understandings of one, or even both, parties to the contract are irrelevant.[6]

(d) In order to ascertain the intention of the parties objectively, it is normally necessary to consider not only the words of the contract, but also the surrounding circumstances known to the parties, and the purpose and object of the transaction.[7]

(i) Ambiguity is not a necessary precursor to examination of surrounding circumstances.[8]

(ii) To be admissible, extrinsic evidence must be relevant to a fact in issue, probative of the surrounding circumstances known to the parties or of the purpose or object of the transaction, including its genesis, background context and the market in which the parties are operating.[9]

(iii) It must be shown that both parties had knowledge of the facts relied on.[10]

(iv) Antecedent oral negotiations and expectations of the parties are inadmissible to show actual intentions or expectations, but admissible to show background facts known to both parties and the subject matter of the contract.[11]

(v) Evidence of concurrent mutual intention is admissible to negative an inference to be drawn from surrounding circumstances.[12]

(e) Post-contractual conduct is not admissible in aid of construction.[13]

[37] The following additional principles of construction adverted to by senior counsel for Velvet Glove were also noted by her Honour at [17]:

(a) where the contract is in a standard form to which the parties have added special conditions, then, unless it provides otherwise, greater weight will be given to the special conditions;[14]

(b) where a contract contains general provisions and specific provisions, the specific provisions will be given greater weight where the facts to which the contract is to be applied fall within the scope of the specific provisions;[15]

(c) contra proferentem,[16] which her Honour took to mean that any ambiguities in what was one of MIM's standard form documents, should be resolved in favour of Velvet Glove and against MIM.

[38] The learned trial judge gave the following reasons for rejecting the arguments put forward by Velvet Glove in favour of the submissions made by MIM:

"[33] The purpose or object of the contract was to provide for the rights and obligations of the parties inter se in relation to [Velvet Glove's] provision of the accommodation units to [MIM].

[34] It is not clear from schedule 5 whether the parties intended a lump sum contract or a rates contract or something else. But schedule 5 must be read with the other provisions of the contract. I do not accept that [MIM's] payment obligations were unrelated to the term of the contract and [MIM's] right to terminate it.

[35] For [MIM] to be liable for the full 12 months' rental as a lump sum from the commencement of the contract would be inconsistent with the contract's always being terminable at the convenience of [MIM], and it would be contrary to commercial sense.

[36] Similarly, for the 'sub-letting' obligations of [Velvet Glove] to survive termination, whether for convenience or otherwise, would be inconsistent with 'termination' and contrary to commercial sense. The sub-letting provision was intended to ensure exclusivity for [MIM] and at the same time allow [Velvet Glove] to rent accommodation units not occupied by [MIM] to other persons (presumably to advance or at least protect the reputation of its business); because [MIM] was obliged to pay rental whether or not it occupied the accommodation units, the sub-letting provision afforded an appropriate safeguard against its receiving double payment.

[37] [MIM's] obligation was to pay in accordance with the contract. By clause 18.5(d)(i) it had to pay the value of the Services performed by [Velvet Glove]: in my view that necessarily meant those performed up to the date of termination. Then it had to pay the amount of any Reimbursable Expenses incurred with the prior written approval of its representative (clause 18.5(d)(ii)). And it had to pay 'any amount due from [it] to [Velvet Glove]' pursuant to the contract (clause 18.5(d)(iii)), less certain deductions.

[38] Clause 18.5(d)(iii) is similar to clause 11.2(c)(iii) in relation to progress claims. The contract contained several provisions by which other moneys might have become due by [MIM] to [Velvet Glove] - clause 6 (variations), clause 7.3(h) (extra costs resulting from any suspension of the provision of Services) and clause 10.2 (extra costs resulting from changes to the law). Clause 18.5(d)(iii) would not be otiose if, on its proper construction, clause 18.5(d)(i) referred to services performed by [Velvet Glove] up to the date of termination: it would, in my view, embrace moneys due under those other provisions.

[39] When the contract is read as a whole, its meaning is clear. [Velvet Glove] is entitled to no more than was certified by [MIM's] representative on 2 February 2009 and paid to it on 18 August 2009.

[40] It is not necessary to consider [MIM's] argument about the penal effect of [Velvet Glove's] construction of the contract."

[39] The learned trial judge thus rejected Velvet Glove's contentions that there were moneys due and owing under the contract and that MIM had failed to fulfil its obligation under cl 18.5(d) by failing to provide a determination of the amount payable pursuant to the clause or, alternatively, failing to provide a correct determination of the amount payable to it, thereby breaching its obligation under cl 2.1(b) and cl 11.1(a) of the contract. Her Honour found that the determination on 2 February 2009 was a correct determination of the amount payable to Velvet Glove under the contract and the claim for breach of contract failed.

[40] The grounds of appeal relied upon by Velvet Glove are:

(a) holding that upon the proper construction of the contract ... Velvet Glove was entitled to no more than had been certified by MIM's representative on 2 February 2009; and

(b) failing to hold that upon the proper construction of the Contract Velvet Glove was entitled to recover from MIM the balance of the lump sum payable under the Contract, after necessary adjustments, being a total of $3,603,098.37.

1. In particular, the learned trial judge erred in failing to:

(a) determine whether the Contract was intended to be, and was, a lump sum contract or a rates contract, and having failed to so determine, was unable to properly determine the dispute between the parties;

(b) construe, or alternatively properly construe, the meaning of the expression 'whether occupied or not' as used and incorporated in the Contract.

(a) holding that the expression 'the value of the Services performed by [Velvet Glove]' in clause 18.5(d)(i) of the Contract must necessarily mean those services performed up to the date of termination;

(b) failing to hold that the 'Services' Velvet Glove was to provide under the Contract was the provision of the '144 Accommodation Units' on and from the 'Commencement Date of the Services'.

1. The learned trial judge erred in failing to hold that, upon the proper construction of the Contract, upon entry into it MIM's obligation for the full amount of the lump sum amount of the Contract accrued, but to be payable in instalments in accordance with the Contract, such that termination for convenience or otherwise once the obligation was incurred was irrelevant.
2. The learned trial judge erred in, having apparently found that the two commercial imperatives recited at sub-paragraphs 30(1)(i)-(ii) of her Honour's reasons were in fact known to both parties, holding that they were matters of subjective intention and not relevant to an objective interpretation of the Contract.
3. The learned trial judge erred in holding that the oral and documentary evidence opened by Velvet Glove, as referred to in paragraphs 43-58 of the reasons for judgment, was probative of the parties' subjective intentions and expectations rather than, as was the case, was probative of objective background facts known to both parties and to the subject matter of the Contract."

[41] Velvet Glove seeks the following orders:

1. That the orders made by the Supreme Court on 27 April 2011 be set aside and that in lieu thereof:

(a) Velvet Glove have judgment against MIM in the sum of $3,603,098.37 plus interest on that sum at the rate of 10% per annum from 27 February 2009; or alternatively

(b) that the matter be remitted to another judge of the Trial Division for a retrial; and in either event

(c) MIM pays Velvet Glove's costs of the appeal to be assessed on the standard basis."

[42] By Notice of Contention, MIM sought to affirm the decision at first instance on the basis that Velvet Glove's construction of cl 18.5, would result in the clause having a penal effect in other foreseeable circumstances. That is, in the situation where the clause operated because a purported termination had been in breach of contract, in which case it was said the clause would operate to provide the mechanism by which damages would be calculated.

[43] The issues that arise for determination on the appeal are firstly the proper construction of the contract and secondly whether the learned trial judge erred in refusing to allow extrinsic evidence to be admitted. Her Honour's finding as to what comprised the contract was not challenged.

**[44] On appeal Velvet Glove summarised the reasons why it ought to have succeeded at trial on its claim that it was entitled to the balance of the lump sum that it had sued for as follows. Since a contract is binding because of the mutual promises made, the principal enquiries concerned what was the service promised or contracted for and what was the price promised to be paid for it in return.

[45] As to what service was contracted for, it was submitted that the view that it was a single, indivisible commitment to provide (and on MIM's part to take) 12 months rental, whether it was used or not, was supported by:**

(a) The definition of "Services" (and its necessary reference to Schedules 2 and 5) and reinforced by the combined reading of the commencement date of the Services, and particularly its term of one year.

(b) Recital A which records the work being on a "periodic basis", rather than recurring.

(c) The "bespoke terms" of Sch 5, and in particular parts 5.1 and 5.2, which were of critical importance. The fact that part 5.1 refers to MIM "Tak[ing] occupancy of the 144 accommodation units for a period of twelve (12) months at a cost of $99.00 per unit per night", and that the table refers to a "Total Rental Price" of $5,203,440 was strongly consistent with the notion that what was being promised by Velvet Glove, and taken by MIM, was an obligation to provide and pay for, respectively, the rooms for a period of twelve months.

(d) The ending words of Sch 5.1 "whether occupied or not" further reinforce this.

**[46] Similarly, it was submitted that the method of payment under the contract supported Velvet Glove's construction. The definition of "Contract Price", and in particular in cl 1.2(a), contemplates a lump sum payment. If it is to be a lump sum it is to be set out in Sch 5, which it is. The nature of the lump sum means that the obligation for it accrues immediately, but during the currency of the contract it is payable by instalments by cll 11.1 and 11.2. In contradistinction to this, the definition of "Contract Price" in cl 1.2(b) would in Sch 5 only contain a rate, and not a period of occupancy nor a "Total Rental Price". The reference to the term is to enable periodic payments under cl 11.1(b).

[47] In oral submissions, senior counsel for Velvet Glove augmented the written submissions that the claim for the balance of the Contract Price was one capable of falling within cl 18.5(d)(i) or (iii). As to cl 18.5(d)(i), it was contended that Velvet Glove "performed" the Services by making and keeping available the 144 units for a period of 12 months, i.e. prospectively.[17] Velvet Glove's primary reliance however was on cl 18.5(d)(iii). As already mentioned, the contention was that the obligation to pay the Contract Price as a lump sum accrued upon the contract being entered into and that during the currency of the contract it was payable by "instalments". It was contended that once MIM chose to bring to an end the arrangements whereby the lump sum could be paid by instalments, the remaining balance became both due and payable under cl 18.5(d)(iii).[18] The effect of termination under cl 18.5 was to bring a "cessation of performance" but it did not by its terms alter the obligation to pay the lump sum already agreed upon.[19] Indeed, cl 18.5(c) by its terms provided for Velvet Glove to submit a final claim form showing the value of the Services performed and the amount payable under cl 18.5(d).[20]

[48] Senior counsel for Velvet Glove also submitted that the learned trial judge made the following errors:**

(a) As to Reasons [34] it was clear from cl 11.1(b) and Sch 5 in particular that the parties intended a lump sum contract. The question was never whether MIM's payment obligations were unrelated to the term of the contract and its right to terminate, but what effect, if any, did a contractual right to terminate have upon an obligation to pay a lump sum already accrued. Clause 18.5(d)(iii) was the provision that dealt with this.

(b) As to Reasons [35], it assumed rather than decided, the controversy, by saying that the liability for the full 12 months' rental for a lump sum from the commencement would be inconsistent with the contract always being terminable at MIM's election. In a standard form agreement that provided for a contractual right to terminate, but where the parties had specifically chosen to deal with each other on the basis that it was a lump sum, the application of the termination for convenience clause, in relation to the amount MIM was obliged to pay, was always going to be substantially if not entirely stultified.

(c) Moreover, it would be even more contrary to commercial commonsense for a person in the position of Velvet Glove to commit to the building of these accommodation units[21] without a commitment to a rental for a minimum term in return. That the outcome below was the one that was contrary to commercial sense was reinforced by the negotiations that led to the parties entering into the agreement in the terms agreed, which was excluded by her Honour, and is summarised in para 2 of the Reply.[22]

(d) As to Reasons [37], there was no basis for implication of the words "up to the date of termination". It was not the language the parties chose to use. It impermissibly fettered the plenary language in cl 18.5(d)(iii) which was otherwise apt to make payable precisely such a sum as the balance of a lump sum. Further, there was no plea of rectification nor that such a limitation should be implied.[23]

(e) As to Reasons [38], there was no rational basis for the selective reading down of cl 18.5(d)(iii).

(f) As to Reasons [39], the conclusion was wrong, because on any view of it there was a tension between the fact that the contract was for a lump sum in respect of the accommodation "whether occupied or not" and the existence of the termination for convenience clause. The learned trial judge failed to read the contract as a whole. The bespoke words of the contract "whether occupied or not" in Sch 5 were not considered in her Honour's analysis of the proper construction at Reasons [33]-[40]. It was impossible to have read the contract as a whole if what was left open was whether it was a lump sum contract, a rates contract or some hybrid of the two.[24]

(g) Further, although the commercial imperatives known to both parties set out at Reasons [30] (i.e. from MIM's perspective - to achieve the accommodation in a short timeframe without any up-front capital payment given that it was on Velvet Glove's land; from Velvet Glove's perspective - not to incur the capital expenditure if it did not receive a guaranteed return) appear to have been accepted, her Honour erroneously dismissed their importance as going only to subjective intention. This was the essence of the context.

**[49] The crux of MIM's submission on appeal, as at first instance, was that Velvet Glove's submissions failed to show how the words of the contract admit the conclusion that the full "lump sum" ever became "due". In that regard, it was contended that Velvet Glove's submissions were premised on the notion that if the contract was a lump sum contract, it must be that there was an obligation to pay the whole amount from the outset. Velvet Glove's case, in effect, was that the contract provided for a present debt for the entire total mentioned in Sch 5 which was payable from time to time in the future, but nevertheless entirely due from the outset. However, there was no necessary equation between the proposition that a contract provides a lump sum Contract Price and the proposition that the whole price was due from the outset.

[50] It was submitted that the question whether a contract was to be regarded as providing that the entire Contract Price was due at the outset but payable in the future was a question of construction: see O'Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359 per Gibbs CJ at 368 to 369. On that basis, MIM's argument focused on the provisions of the contract as to when and how moneys become due and when and how moneys become payable. MIM's case was that moneys become due and payable as provided for in the distinct contractual mechanisms and not otherwise, and the contract revealed a pattern for both progress payments and for payments made on termination, which was inconsistent with Velvet Glove's argument.

[51] In this regard, the terms of the contract that expressly acknowledged the period nature of the contract were emphasised: Recital A provided that MIM required the provision of the Services on a period basis. Likewise the definition of "Contract" in cl 1.2 provided it was a "period contract for services", cl 7.1 obliged Velvet Glove to perform "the Services" (namely the provision of 144 units whether occupied or not) "from the Commencement Date" and "for the Term". Clause 18.5 provided that, notwithstanding any other provision of the contract, it could be terminated early at the convenience of MIM.

[52] For its part, MIM's obligation pursuant to cl 2.1(b) was to "pay for the Services in accordance with this Contract": the promise to pay was one to pay as provided for in the contract. The payment obligation called in by cl 2.1(b) was that set out in cl 11 and cl 18.5 which provided the only contractual mechanism by which moneys could become "due" from MIM to Velvet Glove and then subject to an obligation on MIM to pay within a specified timeframe (cl 11.2(e)).

[53] The key question was thus whether there was any way in which either procedure could operate to oblige the payment of the amount claimed by Velvet Glove consequent upon a termination for convenience. It was submitted that there was no valid construction of the progress payment clause which supported Velvet Glove's proposition that the moneys claimed by it had accrued due prior to the termination by reference to the contract.

[54] As a matter of construction of the words of cl 18.5, payment of the balance of the total rental price for 365 days rental was not a payment to which Velvet Glove was entitled pursuant to cl 18.5(d)(i) because that referred to the value of the Services "performed" by Velvet Glove, which could not include the price referable to the period provision of Services after termination because they would not yet have been "performed".

[55] Nor did the words in cl 18.5(d)(iii) "any amounts due from the Principal to the Contractor pursuant to this Contract" provide a sound basis for recovery of the balance of the Contract Price on the basis that the obligation to pay it accrued upon entering into the contract, albeit that it was payable in instalments during the currency of the contract. It was submitted that the proposition that the progress payments were payments of a lump sum price already "due" flew in the face of the wording of cl 11. The only reason for Velvet Glove's contending that the progress payments were payments of a lump sum price already "due" was to promote the construction urged by it in respect of the meaning of cl 18.5(d)(iii) (which used the same words as appear in cl 11.2(c)(iii)).

[56] One indication of the improbability of Velvet Glove's approach was that, if cl 18.5(d)(iii) should be read in the way suggested, then so should cl 11.2(c)(iii), with the consequence that the whole of the Contract Price could have been claimed in the very first progress payment because it was an amount which was "due". That was not the contractual intention. The ordinary course contemplated by the contract was that Velvet Glove would be paid the Contract Price progressively over the contemplated 12 month life of the contract, with Velvet Glove's entitlement to progress payments accruing due and becoming payable consequent upon the occurrence of the steps provided for in cl 11, but not otherwise. In providing for payment in this way, the contract has adopted a mechanism for creation of debts due and payable by MIM by progress claim.

[57] The intention of cl 18.5(d)(iii) was similar to its analogue in the ordinary progress payment mechanism (namely cl 11.2(c)(iii)) i.e. it would permit recovery for other miscellaneous amounts, such as those which might arise consequent upon, for example, the operation of cl 6, cl 7.3(h) or cl 10.2.

[58] Furthermore, the evident intent of cl 18.5 was not promoted by the approach to the construction of the clause urged by Velvet Glove, since the financial consequences in terms of liability for the full Contract Price would remain the same whether the contract was terminated without cause under cl 18.5 or not .

[59] There was thus no valid construction of the termination for convenience clause which operates to support the proposition that the operation of the cl 18.5 mechanism should have arrived at the amount claimed by Velvet Glove.**

**[60] The contract dated 15 August 2008 and executed by the parties on 15 and 16 August 2008 was one for Services which comprise rental of 144 accommodation units for a period of one year (see particulars). Velvet Glove's fundamental obligation under the contract was to provide the Services on the terms set out in the contract (cl 2.1). It was required to execute the Services in accordance with the requirements of the contract (cl 5.1). Velvet Glove was obliged to comply with the "program" which required the "facility" to be fully operational by 30 August 2008 (five weeks after signing the Letter of Intent, with the completion date being 29 August 2008 (cl 7, Sch 4)).

[61] MIM's fundamental obligation was to pay for the Services in accordance with the contract (cl 2.1). Its payment obligations under the contract were to pay the Contract Price and Reimbursable Expenses - the latter being additional to the Contract Price (cl 11.1(a)). The Contract Price is the lump sum set out in Sch 5, where a lump sum price was accepted, or where a "rates" Contract Price was accepted, the sum ascertained by multiplying the measured quantity of an item of the Services actually executed using the rate in Sch 5. Clause 11.1(a) thus specified the nature of the payment obligations.

[62] Clause 11.2 specified when and how those payment obligations were to be paid during the currency of the contract. It provided a mechanism in cl 11.2(a) for payment through a monthly payment claim for Services executed in the previous month (a Contractor's Claim Form). This was required to be assessed by MIM and, upon a determination as to the amount certified as payable, an Approved Contractor's Claim Form was issued (cl 11.2(b)). Once an amount was so certified as payable and an Approved Contractor's Claim Form was issued, it became an amount due under the contract (cl 11.1(e)).

[63] The determination as to the amount payable was made having regard to the formula in cl 11.2(2)(c), including, where a lump sum Contract Price was agreed, any lump sum breakdown contained in Sch 5 (cl 11.1(b)). Although MIM was liable to pay for the Services comprising the rental, and undertook "occupancy" whether a unit was occupied or not (Sch 5.1), it could agree to Velvet Glove subletting the unit at a lower daily rate than provided in the "Pricing Breakdown" in Sch 5, on the basis that all moneys received are Reimbursed to the Principal (Sch 5.2). Any such amount was taken into account in determining the amount payable in respect of a payment claim (cl 11.2(c)(vi)).

[64] Thus, during the currency of the contract, the Contract Price could be paid progressively on the basis of the Contractor's Claim Form for Services executed. Upon certification as to the amount payable under an Approved Contractor's Claim Form, the amount became payable and due under the contract.

[65] The position upon termination of the contract under cl 18.5 which permitted termination without cause (and which deemed a wrongful termination for breach or insolvency to be a termination under cl 18.5) was that execution of the Services ceased (cl 18.5(a)). The effect of termination under that clause was that MIM's payment liability was capped so that its total liability was not to exceed the Contract Price (including for items such as Reimbursable Expenses) (cl 18.5(d)). Moreover, it could not be liable for any costs or damages claim for consequential loss (cl 18.5(e)).

[66] Where the contract was terminated under cl 18.5(a), Velvet Glove was required to submit a statement showing the value of Services performed and the amount payable under cl 18.5(d) as a consequence of the termination of the contract (cl 18.5(c)). MIM thereupon was required to make a determination of the amount payable as a consequence of the termination by reference to a formula in cl 18.5(d) and issue an Approved Contractor's Claim Form in that amount, which then became due under the contract (cl 11.2.(h)).

[67] The formula in cl 18.5(d) required a calculation to be made taking into account:**

- the amount of any Reimbursable Expenses incurred.

- but less amounts already paid by MIM and amounts payable but not yet paid by it and any money due or which may become due to MIM by Velvet Glove.

**[68] The formula largely mirrors that in cl 11.2(c) to which MIM was required to have regard in determining the amount payable upon a Contractor's Claim Form being lodged for a payment claim. The essential difference is that the calculation required by cl 18.5(d) was a final reckoning and importantly cl 18.5(d) provided that the total amount payable (inclusive of items such as Reimbursable Expenses) was up to but not exceeding the Contract Price.

[69] Velvet Glove contended that nothing in cl 18.5 altered the obligation which already accrued to pay the lump sum, where a lump sum Contract Price was agreed to and that the balance of that amount became payable on termination without cause. The crux of MIM's case was that Velvet Glove failed to show how the full lump sum ever became payable under the mechanism for payment provided in cl 18.5.

[70] I do not consider that in this case notions of commercial utility offer any determinative guidance in the construction of cl 18.5. MIM's contention, accepted by the learned trial judge was that, if the balance of the Contract Price was payable in the event of a termination without cause under cl 18.5, the effect would be contrary to commercial sense. That is, it would strip the clause of its commercial utility. That argument fails to have regard to the full implications of the clause. Firstly, cl 18.5(a) which confers a right on MIM to terminate the contract without any cause, applied even where it purports ineffectively to terminate for breach or insolvency, in which case the termination is deemed to be under cl 18.5. Secondly, in such a case, it operated to protect the Principal from any liability for any costs or damages claim for consequential loss (cl 18.5(e)). Thirdly, it capped the maximum liability of the Principal so that it could never exceed the Contract Price, including any liability for items which did not by definition form part of the Contract Price (cl 18.5(d)).

[71] Velvet Glove's case focused on the fundamental obligation in cl 2.1(b) to pay for the Services in accordance with the contract which it argued "meant the Contract Price as defined in the agreement". This in turn dwelt on the notion that the Contract Price was a lump sum. Velvet Glove's case which is premised on construing the obligation to pay the Contract Price (on the basis of the formulation set out in Sch 5) was one which accrued upon the contract being entered into. But Velvet Glove's argument pays insufficient heed to the words "in accordance with" the contract, which accompany the payment obligation in cl 2.1(b).

[72] MIM's submissions correctly highlighted the flaw in Velvet Glove's case and that is the failure to show how Velvet Glove's contention that Velvet Glove had an accrued entitlement to the full amount of the lump sum, albeit payable by instalments during the currency of the contract, was to be accommodated by the specific and detailed mechanism for payment provided in cl 18.5.

[73] Velvet Glove contended that nothing in cl 18.5 altered the obligation which already accrued to pay the lump sum and that the claim for the balance of the Contract Price was one capable of falling within cl 18.5(d)(i) or (iii).

[74] As to cl 18.5(d)(i), Velvet Glove attempted to meet MIM's argument, accepted by the learned trial judge, that that subclause being in the past tense is directed to Services performed up to the time of termination, by contending that Velvet Glove "performed" the Services by making and keeping available the 144 units for a period of 12 months, i.e. prospectively. But, it must be borne in mind that the subclause does not refer to the Services Velvet Glove agreed to perform but the Services "performed". The contract clearly envisaged the performance of the Services over a 12 month period, so that performance remained executory during the duration of the contract. That is reflected in the contract only allowing for payment claims to be made during the currency of the contract for the value of Services "executed" (i.e. for the period to the end of the previous month). The criticisms of her Honour's findings concerning cl 18.5(d)(i) are without substance.

[75] Recognising the difficulty posed by that subclause, Velvet Glove's primary reliance was on cl 18.5(d)(iii). As already mentioned, the contention was that the obligation to pay the Contract Price in the nature of a lump sum accrued upon the contract being entered into such that there was an accrued debt, payable in "instalments". It was thus contended that, once MIM chose to bring to an end the arrangements whereby the lump sum could be paid by instalments, the remaining balance of the lump sum Contract Price became payable under cl 18.5(d)(iii) as an amount due under the contract.

[76] An analysis of the contract indicates that cl 11 provides the mechanism for determining when and how the Contract Price and Reimbursable Expenses which the Principal has agreed to pay were payable during the currency of the contract. The parties have, by cl 11, agreed in effect to payment of the Contract Price and Reimbursable Expenses by means of progressive interim payments on account, upon the issue of an Approved Contractor's Claim Form (cl 11.2(c)-(h)).

[77] But there is nothing in cl 18.5 which, by its terms, specifies that the balance of the Contract Price becomes payable or is due upon termination under that clause.

[78] As senior counsel for MIM pointed out, Velvet Glove's construction of cl 18.5(d)(iii) left no operation for cl 18.5(d)(i) since on termination the value of the Services performed would be encompassed by the claim for the balance of the Contract Price. The construction offered by MIM, however, allowed for cl 18.5(d)(iii) to operate so as to cover moneys due under other provisions of the contract.

[79] There is a further difficulty with the submissions advanced by Velvet Glove in that it is assumed that, if it became entitled to the balance of the Contract Price, that amount is payable in addition to the claim for Reimbursable Expenses. However, cl 18.5(d) does not, on any construction, allow for Velvet Glove to receive the equivalent of the Contract Price in addition to payments for Reimbursable Expenses incurred. The effect of cl 18.5(d) is to limit the amount payable on termination to a maximum of no more than the Contract Price. The subclause sets the Contract Price as the maximum liability of MIM (including for Services performed, Reimbursable Expenses incurred and amounts due under the contract) not as the minimum amount guaranteed under the contract.

[80] Nor do the subletting provisions in Sch 5 assist Velvet Glove. Because it contends that the balance of Contract Price is due upon termination, Velvet Glove also contends that MIM has an accrued right at the time of termination in respect of the subletting of the units. However, in my view, the subletting provisions do not survive termination under cl 18.5 (as MIM accepted in its submissions). Once the contract is terminated under that clause, MIM no longer "undertakes" the occupancy of the units and it therefore ceases to be entitled to the benefit of the provisions of Sch 5 (other than in respect of any subleases of units entered into before termination). After termination, Velvet Glove would be entitled to deal with the units as it wished.

[81] Velvet Glove has failed to demonstrate error by the learned trial judge's finding that neither cl 18.5(d)(i) nor cl 18.5(d)(iii) allowed for the claim made by it.

[82] It follows that the issue raised by MIM in its Notice of Contention does not require determination.

**[83] At the commencement of the trial, senior counsel for Velvet Glove opened a body of oral and documentary evidence relating to communications between the parties before the contract was executed, submitting that it was admissible as evidence of the context in which the parties reached their agreement.

[84] The learned trial judge ruled the evidence inadmissible. In her reasons for doing so, her Honour noted that the identity of the parties and the nature of their respective businesses were admitted on the pleadings. The purpose or object of the contract was readily apparent from the terms of the contract itself. It was common ground that the accommodation units had to be constructed in order to meet Velvet Glove's fundamental obligation under the contract, and the contract contained an express requirement that they be fully operational by 30 August 2008.

[85] In those circumstances, her Honour considered that the evidence sought to be adduced was probative of the parties' subjective intentions and expectations rather than of objective background facts known to both of them and the subject matter of the contract. Her Honour explained how that was illustrated by the documents which were marked "A"-"I" for identification and the evidence of a conversation between Mr Guilmartin and Mr Hines-Rhodes on 12 or 13 August 2008 which was sought to be adduced.

[86] Mr Neal Guilmartin was a director of Velvet Glove, and Ms Fiona Guilmartin (a lawyer) was his sister. Mr Max Hines-Rhodes was an employee of Evans & Peck, who were consultants to MIM; he corresponded with Velvet Glove as if he were acting on behalf of MIM. Mr Kevin Hendry was a senior employee of MIM and Ms Jacqui Jeffries and Ms Lynette Napier were both employees.

[87] MFI-A was a letter from Mr Guilmartin to Mr Hines-Rhodes dated 23 July 2008, setting out Velvet Glove's first proposal. MFI-B was a further copy of that letter bearing some handwritten changes to the proposal which emerged from a discussion between Mr Guilmartin and Mr Hines-Rhodes. MFI-C was an amended version of that letter produced electronically to reflect changes that Mr Hines-Rhodes wanted. The contract documentation was to be prepared by MIM. MFI-D was a short letter which Mr Guilmartin caused his sister to send to Mr Hines-Rhodes on 24 July 2008, quoting a unit price for the accommodation units of "$9,000 each plus 10% mark-up plus $100,000". This was sent in response to MIM's request for a Pricing Breakdown.

[88] MFI-E was an email from Mr Hines-Rhodes to Mr Guilmartin dated 25 July 2008, in response to Mr Guilmartin's inquiry about when he would receive a Letter of Intent from MIM. Mr Hines-Rhodes said that the Executive General Manager and he had "signed off for you to proceed with the works, as agreed the expectation is a four week period from today all in".

[89] MFI-F was an internal Xstrata document - a memorandum from Mr Hines-Rhodes to Mr Hendry dated 23 July 2008, recommending that a contract be awarded to Velvet Glove. Attached to it was a document headed "Application for Contract" dated 24 July 2008, which referred to a contract for the supply of the accommodation units "on cost reimbursable basis estimated at $9,000 each plus 10% mark-up plus $100,000", providing for a Contract Price of $1,525,600 and total approved expenditure including contingency of $1,679,000. Also attached was a copy of MFI-D and a quotation from another company to construct the units, and design data.

[90] MFI-G was a further internal Xstrata document, being an email from Ms Jeffries to Ms Napier dated 25 July 2008, to which was attached an unsigned Letter of Intent in relation to a proposed contract for the supply and construction of the accommodation units. MFI-H was the Letter of Intent dated 28 July 2008, a copy of which accompanied the contract when it was delivered to Velvet Glove for execution but found not to comprise part of the contract documents. It provided:**

"Xstrata Zinc Mount Isa Mines Limited acknowledges Velvet Glove Holdings Pty Ltd offer for the rental of 144 accommodation units at Moondarra Caravan Park.

Xstrata Zinc Mount Isa Mines will take occupancy of the accommodation units for a period of twelve (12) months at a cost of $99.00 per unit per night, whether occupied or not.

The rooms shall not be sublet to any other party without Xstrata's consent. If Xstrata Zinc agree to sublet, the units can be sublet at a lower rate and all money shall be reimbursed to Xstrata Zinc Mount Isa Mines.

The awarding of the Contract for the abovementioned will be subject to the finalisation of the terms and conditions of the Contract and Xstrata's BOARD final approval.

In the event that the parties are unable to agree on final terms and conditions of the Contract, Xstrata Zinc Mount Isa Mines shall meet all reasonable costs incurred by Velvet Glove Holdings Pty Ltd up to the date that a formal notification is provided that the Contract shall not proceed.

This Letter of Intent shall act in the form of an order for Velvet Glove Holdings Pty Ltd to proceed with the construction of the rental accommodation in order to meet Xstrata Zinc Mount Isa Mines expected outcomes.

Xstrata Zinc Mount Isa Mines looks forward to a mutually rewarding relationship with Velvet Glove Holdings Pty Ltd."

**[91] MFI-I was an Xstrata document dated 29 July 2008, headed "Application for Contract" which contained a brief description of the contract for the rental of the accommodation units executed by the parties, including that "Xstrata will rent 144 units at Calculations = 144 Units x $99.00 per night x 365 days = $5,203,440.00 (Plus 10% contingency)". It also made reference to a lump sum of $5,723,784. It bore the consents of the relevant senior officers of Xstrata to MIM's entering the contract, those consents having been endorsed between 30 July and 12 August 2008. It was also one of the documents that accompanied the contract when it was delivered to Velvet Glove for execution but which was held not to comprise part of the contract between the parties.

[92] Evidence was also sought to be admitted of the conversation between Mr Guilmartin and Mr Hines-Rhodes on 12 or 13 August 2008, that was alleged in the Reply. It concerned an occasion when the draft contract was discussed and Mr Guilmartin asked Mr Hines-Rhodes what the termination for convenience clause meant. Her Honour held that that evidence would have been probative of no more than what Mr Hines-Rhodes and perhaps Mr Guilmartin intended the contract to mean. Moreover, even if Mr Hines-Rhodes could be shown to have had MIM's authority to say what he did, the evidence was not sought to be led to negative an inference to be drawn from surrounding circumstances: it did not come within the narrow category of evidence of subjective mutual intent identified by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337.**

[93] The starting point for a consideration of the principles of contractual interpretation is Codelfa and Mason J's statement at 352:

"The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract where it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although ... if the facts are notorious knowledge of them will be presumed.

It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subjective matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification."

[94] In Investors Compensation Scheme Ltd v West Bromwich Building Society [1997] UKHL 28; [1998] 1 WLR 896 at 912-913 Lord Hoffmann restated the principles for contractual interpretation. In Royal Botanic Gardens and Domain Trust v South Sydney City Council [2002] HCA 5; (2002) 240 CLR 45 Gleeson CJ, Gaudron, McHugh, Gummow and Hayne JJ in a joint judgment made the following observations at 62 [39] about the significance of Lord Hoffman's re-statement of the principles of contractual construction (and of Lord Bingham of Cornhill in Bank of Credit and Commerce International SA v Ali [2001] UKHL 8; [2002] 1 AC 251 at 259, 269) insofar as it impacted on the principles enunciated in Codelfa:

"It is unnecessary to determine whether their Lordships there took a broader view of the admissible 'background' than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa, should continue to follow Codelfa." (footnotes omitted).

[95] Subsequently, in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179 [40] the High Court stated:

"It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction." (footnotes omitted).

**[96] Although that statement involves an endorsement of the first principle summarised by Lord Hoffman in Investors Compensation Scheme Ltd, this Court must bear in mind the caution issued by the High Court in Royal Botanic Gardens. That warning was reiterated in Byrnes v Kendle [2011] HCA 26 by Heydon and Crennan JJ (at fn 135) who observed in particular that the opinions stated in Masterton Homes Pty Ltd v Palm Assets Pty Ltd [2009] NSWCA 234; (2009) 261 ALR 382 at 384-385 [1]- [4] and 406-407 [112]-[113] and Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407; (2009) 76 NSWLR 603 at 616-618 [14]- [18], 621-622 [42], 626 [63] and 663-678 [239]-[305] must be read in the light of the High Court's caution in Royal Botanic Gardens.

[97] In Byrnes v Kendle the High Court reaffirmed the principle of objectivity by which the rights and liabilities of the parties to a contract are determined, as it did previously in Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 at 461-462 and Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 at 179 [40]. In Byrnes v Kendle Gummow and Hayne JJ at [59] endorsed the statement in Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422 at 429 that the objective theory of contract formation stands "in command of the field" and is concerned not with "the real intentions of the parties but with the outward manifestations of those intentions." French CJ agreed with and adopted those remarks at [17]. Heydon and Crennan JJ stated at [98]:**

"Contractual construction depends on finding the meaning of the language of the contract - the intention which the parties expressed, not the subjective intentions which they may have had, but did not express. A contract means what a reasonable person having all the background knowledge of the 'surrounding circumstances' available to the parties would have understood them to be using the language in the contract to mean. But evidence of pre-contractual negotiations between the parties is inadmissible for the purpose of drawing inferences about what the contract meant unless it demonstrates knowledge of 'surrounding circumstances'." (footnotes omitted)

**[98] Velvet Glove's submission was that the matters alleged in para 2 of the Reply and the documents marked for identification which were refused admission at trial were relevant and admissible, in that they provided the context of the common and stated purpose and objective of the transaction. They also explained the commercial sense of the bargain the parties ultimately entered into. In particular, the proposed evidence recorded the words and conduct inter parties that spoke to what a reasonable person in the position of each of the parties would have believed, none being a subjective or unexpressed view or understanding.

[99] Senior counsel for MIM contended that despite Velvet Glove's assertions, it neither pleaded, nor identified at trial the particular background fact known to the parties of which the alleged evidence was probative. Adopting the terminology used in Phoenix Commercial Enterprises Pty Ltd v City of Canada Bay Council [2010] NSWCA 64 at [30], senior counsel contended that the proposed evidence was "drenched in subjectivity".

[100] In oral submissions, senior counsel for Velvet Glove contended that the evidence of the preliminary negotiations and the conversation in August 2008 went to the context that MIM was unwilling to make an "up-front capital payment" given that the units were to be constructed on Velvet Glove's land and Velvet Glove was not prepared to incur the capital expenditure if it did not receive a guaranteed return. But, as senior counsel accepted, that much could be said to be evident from the contract itself.

[101] I accept the submissions made by MIM that the only purpose in reality for the tender of the evidence was the impermissible purpose of showing actual subjective intentions or expectations. Such evidence might have been admissible on a rectification suit, but it was not admissible under the guise of "context". (In any event, it is not immediately apparent how the pre-contractual documentation, if it were admitted, advanced Velvet Glove's construction of the contract. If anything it revealed that, while on the one hand Velvet Glove was at risk that the contract might be terminated early without cause under cl 18.5, on the other hand, Velvet Glove's construction costs in the vicinity of $1,500,000 (as outlined in MFI-I) would be recovered many times over if the contract went its full term.)

[102] Moreover, senior counsel for Velvet Glove conceded[25] that resort to the extrinsic evidence in question should only be had if the proper construction of the contract "was so nicely balanced that the extrinsic evidence of background would in a material way bear upon the outcome".

[103] As is apparent from the view expressed above, the learned trial judge was correct in finding that the evidence sought to be adduced was not admissible on the basis that, when the contract was looked at in its entirety, the language used in the contract was not ambiguous or susceptible of more than one meaning. Resort to the extrinsic evidence sought to be adduced was not permissible.**

**[104] Before the learned trial judge it was common ground that Velvet Glove, having failed in the claim litigated, should be ordered to pay MIM's costs of and incidental to the proceeding, including reserved costs, but excluding the costs concerning the Reimbursable Expenses claim pleaded in the amended statement of claim. The area of dispute was whether the costs should be ordered to be assessed on a standard or indemnity basis. Velvet Glove, with leave granted on 1 July 2011, appealed her Honour's decision that MIM's costs be assessed on an indemnity basis.

[105] Before considering the costs appeal, it is pertinent to note some matters by way of background. Before the litigation was commenced, the parties engaged in a compulsory dispute resolution process. On 15 May 2009, the day following the compulsory dispute resolution process ended, MIM made a Calderbank offer to Velvet Glove to pay $1,215,000 plus GST ($1,336,500 including GST). Velvet Glove rejected the offer and commenced the present proceedings on 21 May 2009 for Reimbursable Expenses of $1,516,365.56 (including GST) and $3,275,543.97 plus GST being the claimed unpaid balance of the Contract Price. On 16 October 2009, the Reimbursable Expenses claim was settled for $770,000 inclusive of GST, interest and costs. The learned trial judge referred to established principles applicable to the consideration of an indemnity costs order on the basis of a refusal of a Calderbank offer, including those set out in Colgate Palmolive Company v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 and Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298. Her Honour noted that it is well accepted that a party who unreasonably refuses to accept a Calderbank offer, on terms more favourable than the court's subsequent order, may be ordered to pay indemnity costs. Her Honour had regard to the factors relevant to assessing reasonableness set out in Hazeldene's Chicken Farm Pty Ltd. In concluding that Velvet Glove's rejection of the Calderbank offer was unreasonable such that it was appropriate that indemnity costs be ordered, her Honour stated:**

"At the time the offer was made both the accommodation lump sum issue and the reimbursable expenses issue were unresolved. [MIM] made it plain that it had no apparent concerns about being liable for the accommodation lump sum issue but acknowledged it was at some risk in relation to the reimbursable expenses claim. The amount offered was close to the amount claimed for reimbursable expenses. Nevertheless, it was an offer to settle the whole dispute and not just the reimbursable expenses claim. That [MIM] subsequently made an offer to settle the reimbursable expenses claim which was accepted by [Velvet Glove] does not alter the scope of the Calderbank offer.

The offer contained express reference to the decision in Calderbank, and foreshadowed an application for costs on the indemnity basis.

After the defence was filed [Velvet Glove] applied for summary judgment. This was resisted by [MIM] which relied upon extensive affidavit material and asserted complexity such that the matter ought not to be determined summarily. The application was dismissed and costs were reserved.

The reimbursable expenses claim was subsequently settled and the defence was amended by the deletion of material relating to that claim.

The Calderbank offer clearly set out the basis for [MIM's] rejection of the accommodation lump sum issue. This was not a case which turned on the evidence. At the end of the day it was purely a question of construction unaided by any substantial evidence."

[106] I am unable to discern the element of unreasonableness displayed by Velvet Glove in refusing to accept the Calderbank offer. It was made at a time when both claims brought by Velvet Glove were unresolved and in circumstances where MIM, in resisting a summary determination of Velvet Glove's claim, pointed to and asserted that the issues disputed were of a complex nature. Nor would I characterise the construction of the contract advanced on behalf of Velvet Glove as one that was so lacking in merit as to be unarguable, such that its conduct in rejecting the Calderbank offer should be viewed as unreasonable, and the learned trial judge did not so characterise Velvet Glove's case. In those circumstances, I consider that the discretion to order indemnity costs miscarried. I would order that the costs order of the learned trial judge be varied so that MIM's costs are to be paid on a standard, rather than an indemnity basis.

[107] The orders I would make are that the appeal be dismissed, except for the appeal against the order for costs made on 3 June 2011, which should be varied so as to require Velvet Glove to pay MIM's costs on a standard, rather than an indemnity, basis.

[1] Clause 1.1 provided that the terms defined in the Particulars "have the meanings given in the Particulars".

[2] Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158, [20] per Muir JA, citing Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, 179.

[3] Thiess Services Pty Ltd v Mirvac Queensland Pty Ltd [2005] QSC 364, [36]; (2006) 22 BCL 218.

[4] Thiess Services Pty Ltd v Mirvac Queensland Pty Ltd [2005] QSC 364, [37]; (2006) 22 BCL 218, citing L Schuler A G v Wickman Machine Tool Sales [1973] UKHL 2; [1973] 2 All ER 39, 45 per Lord Reid.

[5] Australian Casualty Co Ltd v Federico (1986) 160 CLR 513, 520 (referred to in McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 641-642 [197]; Sirius International Insurance Co (Publ) v FAI General Insurance Ltd [2004] UKHL 54; [2005] 1 All ER 191, 200; [2004] UKHL 54, [19], per Lord Steyn.

[6] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451, [22]; [2004] HCA 35; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40]; International Air Transport Association v Ansett Australia Holdings Ltd [2008] HCA 3; (2008) 234 CLR 151, [53].

[7] Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165, [40].

[8] Lion Nathan Australia Pty Ltd v Coopers Brewery Ltd [2006] FCAFC 144; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, [14]-[18] per Allsop P, [49] per Giles JA and [239]-[305] per Campbell JA; The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111 per Macfarlan JA (with whom Young JA and Sackville AJA agreed); Ralph v Diakyne Pty Ltd (ACN 099 168 402) [2010] FCAFC 18, [46] per Finn, Sundberg and Jacobsen JJ.

[9] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 350 per Mason J, citing Reardon Smith Line Ltd v Hansen Tangen [1976] 1 WLR 989.

[10] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; The Movie Network Channels Pty Ltd v Optus Vision Pty Ltd [2010] NSWCA 111.

[11] Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407, [51] per Giles JA, citing Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596, 606; [1979] HCA 51 and Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352 per Mason J.

[12] Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982)149 CLR 337 at 352-353.

[13] Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57; Franklins Pty Ltd v Metcash Trading Ltd [2009] NSWCA 407.

[14] Sir Kim Lewison, The Interpretation of Contracts (Sweet & Maxwell, 4th ed, 2007) [7.04]; Rivat Pty Ltd v Brian & Neill Elomar Engineering Pty Ltd [2007] NSWSC 638 at [43].

[15] Sir Kim Lewison, The Interpretation of Contracts (Sweet & Maxwell, 4th ed, 2007) [7.05].

[16] North v Marina [2003] NSWSC 64; Wesoky v Village Cinemas International Pty Ltd [2001] FCA 32, [47]. There are limits on the application of this principle: McCann v Switzerland Insurance Australia Ltd [2000] HCA 65; (2000) 203 CLR 579, 602 per Kirby J.

[21] That Velvet Glove had to build the accommodation units was common ground - Reasons [45].

[22] See also Reasons [43] and [49]-[57].