Watpac Construction (Qld) Pty Ltd v KLM Group Ltd & Ors

1. For the reasons set out above in respect to 'VPR Already Agreed', I find that [KLM] is entitled to make a claim under the Act to reprice agreed variation prices using 'reasonable rates and prices' pursuant to clause 40.5(c) and 13(a) of the [Payments] Act for the Category 1 disputed variations mutually described as 'VO Price Already Agreed'. I otherwise assess and value this group of disputed variations in accordance with clause 40.5(c) below."

**[63] Watpac argues that this treatment of the latter category ignored what it says were different arguments which it had advanced to the adjudicator in relation to it. Accordingly, it argues, there was an absence of a bona fide attempt to discharge the adjudicator's function and a denial of natural justice.

[64] But in my view, the arguments in relation to these two categories were effectively the same. That was reflected in Watpac's submissions to the adjudicator where, in paragraphs 18.6 and 18.7, Watpac made a series of submissions which addressed both categories. There was nothing in Watpac's submissions to the adjudicator to suggest that there could be different outcomes between the two categories. And Watpac's submissions to this court do not explain how that might have occurred. Therefore, this further complaint provides no basis for impugning the adjudication decision.

[65] This proceeding was commenced by an Originating Application. The original grounds did not include any allegation of fraud on the part of KLM in making its claim. The case came before a judge in the Applications List on 11 March 2013. As appears from Watpac's outline of argument filed on that day, fraud was not part of its case. The matter was then adjourned for hearing over one day in the Civil List.

[66] Watpac raised its fraud case by filing and serving an affidavit of Mr Neil Cochrane (an employee of Watpac) on 28 March 2013. At least by this point, this case was one which should have been the subject of pleadings. Indisputably any fraud case must be precisely formulated and expressed, so that the party against which it is made knows the elements of the case and has sufficient particulars of it.

[67] As I will discuss, Mr Cochrane's analysis was flawed and the case advanced within his affidavit cannot succeed. However, Watpac ultimately argues a different case of fraud, which it seeks to make out by reference to documents which were produced at the trial. But I am not persuaded that this second fraud case is established either.

[68] In its many variants, Watpac's fraud case is directed at two components of KLM's claim for delay costs. KLM claimed a delay of 345 days at a daily rate of $8,333.46. That daily rate included $7,300.17 per day representing relevant overhead costs. There were three categories of overheads as claimed by KLM: onsite overheads, Queensland office overheads and corporate office overheads. The components which were challenged were the second and third categories. At least in its original fraud case, Watpac said that these two components were grossly overstated in KLM's claim, and fraudulently so.

[69] The adjudicator accepted KLM's quantification of each of these components. But he did not accept the quantification of the onsite overheads and therefore he reduced the daily rate to $6,214 per day.

[70] KLM's business is the provision of electrical services throughout Australia. KLM and a related company, Allied Technologies Australia Pty Ltd, are wholly-owned subsidiaries of the same parent company. The business of this group has three distinct divisions: Electrical & Data and Audiovisual, which are conducted by KLM, and the business conducted by Allied Technologies. The three divisions are conducted from premises in each of the Australian States and the ACT (save for Tasmania where there is no Allied Technologies division). The head office of the group is in Melbourne. The three divisions of the business in Queensland are conducted from premises in Newstead in Brisbane.[21]

[71] The Queensland office overheads are costs associated with the Newstead office. The corporate office overheads are costs associated with the head office in Melbourne.

[72] In the Adjudication Application, KLM described the three components of the overheads claim as follows:**

"(i) The following items are included in the Delay Costs claim:

(A) On-site overheads, being actual preliminary costs distinguishable from direct costs of construction and include salaries of site supervisory staff, general construction plant and equipment, small tools and consumables, site services and site office expenses;

(B) Off-site overheads in respect of the Applicant's Newstead Office (the Queensland office), being off-site overheads performed away from the Site for services that were required to be performed as part of the work done under this Subcontract eg administration, payroll, safety officer etc, proportional allowance (25% funded by this job) for office rent, stores, vehicles, etc; and

(C) Off-site overheads in respect of the Applicant's Melbourne Corporate Office, being time related costs not attributable to a particular Subcontract eg executive and clerical salaries, rent, mortgage."

**The Adjudication Application was supported by, amongst others, a statutory declaration of a Mr Buckley, who was employed by KLM in Melbourne as Executive General Manager. Paragraph 76 of his statutory declaration described the three categories of overheads in identical terms to the passage from the Application which I have set out.

[73] I come then to Mr Cochrane's affidavit, upon which this fraud case, in its original form, was made. Fundamental to Mr Cochrane's evidence was his interpretation of the reference to "25% funded by this job" within paragraph [B] of that passage from the application (and its equivalent in Mr Buckley's statutory declaration). As Mr Cochrane read the claim, KLM had quantified these two categories of overheads by, in each case, calculating the total overheads for the relevant office and then dividing that number by four.

[74] Upon that premise, Mr Cochrane went first to the corporate office overhead charge and to some calculations for that component which appeared in Schedule C to Schedule 3 of the payment claim. On that page there were five lines of notes underneath a heading "Corporate Charge Calculations". On one line there was the description "YTD June 2012 Corporate charge for Qld KLM Electrical", against which $70,000 appeared. On another of the lines were the words "Total Corporate Rebate Qld KLM Electrical received", against which $8,913.88 appeared. As Mr Cochrane identified, the total of those two amounts ($78,913.88) was one half of the amount of $157,827.77, which was claimed as "corporate office overhead charge". The financial year for KLM commenced on 1 April so that the amount for "YTD June 2012" represented the three months from 1 April 2012. KLM multiplied that amount by two to produce a figure which would be representative of these overheads for the six months commencing 1 January 2012, as appeared from the words, against this component, on that page of the schedule being "Pro Rata for Jan-Mar". It was a quantification of a six monthly figure so that it could be added to other costs, as set out on the same page as the schedule, which were calculated for a six month period. The total of these costs over six months became $1,314,030.21, which the same page showed as $219,005.03 per month and $7,300.17 per day.

[75] As Mr Cochrane saw it, KLM had grossly overstated the component for the corporate office overhead charge. As he saw it, this was an apportionment of the Melbourne overheads to the Electrical & Data business of KLM in Queensland, so that the amount to be claimed could be no more than 25 per cent of $157,827.77. This came from his understanding of that passage from the Adjudication Application which I have set out.

[76] On an objective view, that was not the meaning which should have been given to that passage. The reference to "25% funded by this job" was made only in respect of "office rent" and then only for the Newstead office. More relevantly, it appears that this was the meaning which KLM intended. In order to establish a fraudulent misrepresentation, it must be proved that the representor had no honest belief in the truth of the representation in the sense in which he intended it to be understood.[22] Mr Jinks gave unchallenged evidence in this court that this subcontract was the only job of the Electrical & Data division of KLM in Queensland at relevant times. Therefore, such of the costs of the Melbourne office which had been apportioned to the Queensland Electrical & Data business of KLM were wholly attributable to this job. The cost of the Newstead office was a different matter. It was appropriate to apportion the rent of the Newstead office because the use of that office was not limited to the Electrical & Data division of KLM.

[77] Mr Cochrane believed that the maximum which could have been genuinely claimed was 25 per cent of $157,827.77. He was incorrect, because of his misunderstanding of that reference to 25 per cent. The allegation by Watpac in relation to this component, at least as it was at the commencement of the trial, could not be accepted.

[78] The same error affected Mr Cochrane's analysis of the component for the Newstead office. In his affidavit, he said that he understood:**

"From Schedule C to Schedule 3 and Mr Buckley's explanations that the amount of $464,969.97 which is included in KLM's calculation of its daily delay rate represents 25% of KLM's QLD Office Overheads for a period of six months."

**On that understanding, he observed, the total Queensland office overheads for a year would be in excess of $3.7 million, which he said would grossly overstate the true figure. He reached that conclusion by offering a series of his own estimates of the likely overheads of the Newstead office, from which he arrived at an amount of $667,148.44 as the "maximum KLM Queensland annual overhead". He then divided that by two to reach a figure for six months and again by four, upon the premise that only 25 per cent of these costs was attributable to this job.

[79] His analysis did not purport to be a comparison of what KLM had claimed (as Mr Cochrane interpreted the claim) and what was said to be the costs recorded in KLM's accounts. Rather, it was a comparison of the amount claimed and what he believed was the likely level of actual overheads. For example, in relation to the rent upon the Newstead office, Mr Cochrane acted upon some information which he had received about the rental at which the office had been advertised for lease in 2010, from which he made an estimate of the rental for the relevant period based upon certain assumed increases. For overheads in the nature of costs of vehicles, Mr Cochrane said that he did not know "what or how many vehicles are included" in KLM's calculation. Of course there had been no disclosure of documents from which Mr Cochrane might have made a comparison with the costs which were recorded in KLM's accounts. The absence of that material would have placed a significant limitation upon Mr Cochrane's analysis, had it not already suffered from the fundamental flaw of a misinterpretation of KLM's claim.

[80] Watpac sought to improve its fraud case by requiring KLM to produce a number of accounting records, which it did, at the trial. By reference to those records, Mr Jinks was able to explain the calculation of most but not all of the Newstead office overheads. The documents included monthly profit and loss summaries for the Queensland Electrical Division over the six months from January to June 2012, in which the total of the "expenses" recorded against this division in Queensland was $414,000. This left a balance of $50,969.97 unexplained. Mr Jinks was unable to explain it. He did not prepare Schedule C to Schedule 3 in the payment claim. But he was able to say that this part of the calculation was performed by Mr Vievers of KLM's Queensland office. Mr Vievers did not give evidence. But his absence was explained by Mr Jinks, who said that he was walking in the Tasmanian wilderness and could not be contacted.

[81] Mr Jinks was able to say that there was no allowance for rent or part of the rent from the Newstead office in any of the amounts recorded in the accounts as "expenses" for the Electricity Division, because the entire rent for Newstead had been recorded in the accounts as an expense of the Allied Technologies business. Mr Jinks explained that this was not because the Newstead office was not also used by the other businesses, but that it was because "the bulk of our projects ... at the time" were through the Allied Technologies business. It is consistent with that evidence that there was an apportionment of 25 per cent of the Newstead rent to the Electrical business.

[82] On Mr Cochrane's analysis of the likely rent for Newstead, a "very conservative" estimate would have been $106,126.59. If that is approximately correct, then 25 per cent of the rental would explain at least half of this otherwise unexplained amount of $50,969.97.

[83] In cross-examining Mr Jinks, counsel for Watpac explored the nature and extent of the claim for costs in the nature of salaries and wages. In Schedule C to Schedule 3 of the payment claim, there was a column headed "Salary Oncosts" which set out amounts against the names of some 16 employees. Seven of those employees were described as Site Supervisors, for whom their entire salaries were allocated to this job within this Schedule. For the other nine employees, only 25 per cent of their salaries was allocated to this job. They included Mr Buckley, for whom there was a note "additional to corporate overhead", apparently meaning that this share of his salary had not been included within the Melbourne office calculation. There were then eight employees of the Queensland office, including the Queensland manager, for whom 25 per cent of the salaries was allocated to this job.

[84] Watpac's counsel explored with Mr Jinks a possible double counting of salary costs, that is to say an inclusion of some salaries (or parts of salaries) within both the "direct [site] overheads" and the Newstead office overheads. The evidence which resulted, when combined with Mr Jinks's affidavit evidence, put paid to that suggestion of double counting. In particular, the profit and loss accounts for the Queensland Electrical Division for the three months commencing 1 January 2012 show that there were some costs in the nature of salaries of "white collar" employees which were recorded as direct cost of sales, and other salaries which were recorded as overheads. For example, in January 2012, the total "expenses" (overheads) against the Queensland Electrical Division was recorded as $98,000[23] of which "indirect salaries and wages" of $54,385 formed part.[24]

[85] Mr Jinks provided an explanation for why some employees were within this "Salary On-costs" column, distinctly from the column headed "Queensland Office Overheads". It was because in the ordinary course, and without reference to this job or this litigation, the cost of particular employees was recorded in the accounts against the Allied Technologies division. This was the case with the Queensland manager. So in the calculation of its claim, KLM has then apportioned 25 per cent of the costs relating to him to the Electrical Division and thereby to this job.

[86] I accept the evidence of Mr Jinks. I see no reason to reject any part of it, and ultimately I do not understand that Watpac submitted that I should.

[87] Watpac also argues that there was a misrepresentation of a different kind, namely that KLM had represented that within the Newstead overheads, there was no "substantial wages content".[25] I would accept that the schedule did not make it clear that there was such a component within the Newstead overheads component of $464,969.97. But I do not accept that KLM represented that there was no such item within this overheads claim. In any case, the present question is whether KLM has defrauded the adjudicator, by claiming an amount for overheads which was false and which has materially affected the adjudication. Ultimately, Watpac fell far short of proving that the amount claimed for Queensland Office Overheads was false, let alone a fraudulent claim.

[88] On the Corporate Office Overhead charge, Watpac's ultimate argument is this: the schedule misrepresented that the amount of $157,827.77 was "as per QLD Elect P&L". Those words did appear beneath both the column for the Queensland Overheads and the column for the Corporate Office Overheads. Therefore, Watpac's submission would apply to both figures.

[89] In neither case did the figure in the column appear in or derive from the profit and loss statements prepared for the Queensland Electrical Division.

[90] For the Queensland overheads, there is that balance of $50,969.97 as identified by Mr Jinks. It is clear enough that at least some of that amount can be explained as costs which had been recorded against the Allied Technologies business.

[91] For the Corporate Office Overheads, the P&L for the June 2012 quarter showed three amounts against "internal management fee", totalling $69,934. This explains the note in Schedule C to Schedule 3 that the "YTD June 2012 corporate charge for Qld KLM Electrical" was $70,000. The amount of the "total corporate rebate" was, as I have noted,[26] $8,913.88. But the notes also explained that this was an apportionment of the "total corporate rebates" ($137,053.75) to the Queensland Electrical business. The apportionment was 6.5 per cent, as was again shown in the schedule. Mr Jinks explained that this was the percentage of the overall revenue of KLM for that quarter which was derived from the Qld Electrical Division.[27] Therefore, it is true to say that this figure of 6.5 per cent was not found in or derived from simply the profit and loss statements for the Queensland Electrical Division.

[92] Therefore, it may be said that there are some elements in the calculation of these two overhead components (Queensland and Corporate Office Overheads) which were not within the "Qld Elect P&L". But that hardly provides a basis for setting aside the adjudicator's decision, absent any demonstrated falsity in the figures themselves. It is true that the adjudicator may have been more easily persuaded by this evidence because of the notation that the figures were derived from the profit and loss statements. But had KLM been more precise, and referred also to its other accounts from which some elements of the calculation were sourced, the evidence would have been no less persuasive.

[93] In my conclusion, none of the suggestions of fraud is made out.

[94] None of the grounds for challenging this adjudication decision is established. The application must be dismissed. The result is that the respondent, at least for the time being, retains the benefit of an adjudication by which it was awarded nearly $3 million but which, as my judgment should indicate, resulted from some errors in the interpretation of the contract. But that is the consequence of the very limited scope for judicial review of these decisions.**

[1] Adjudication Application, paragraph 5.8(e).

[2] Paragraphs 81 and 82 of his Reasons.

[4] [2013] NSWSC 176 at [53]- [64].

[5] Being the submission referred to in the adjudicator's Reasons at paragraph 81(ii)(c).

[6] Outline of submissions on behalf of the applicant, paragraph 43(b).

[7] [2010] HCA 1; (2010) 239 CLR 531 at 573 [71].

[8] [1995] HCA 58; (1995) 184 CLR 163 at 177-178.

[9] [2010] NSWCA 190; (2010) 78 NSWLR 393 at 426-427.

[10] See also Thiess Pty Ltd v Warren Bros Earthmoving Pty Ltd & Anor [2012] QCA 276 at [95].

[11] [2005] NSWCA 228; (2005) 63 NSWLR 385 at 399 [52] (Basten and Ipp JJA agreeing).

[12] [2011] NSWSC 1039 at [44] citing Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140.

[13] [2012] QSC 346 at [8].

[14] [2005] NSWCA 228; (2005) 63 NSWLR 385 at 399 [52].

[15] Holmwood Holdings v Halkat Electrical Contractors [2005] NSWSC 1129 at [110].

[16] Outline of submissions on behalf of the applicant, paragraph 48.

[17] [2002] NSWCA 211.

[18] [2008] QSC 58.

[20] Outline of submissions on behalf of the applicant, paragraph 72.

[21] All of these facts are within the affidavit of Mr M P Jinks and are uncontroversial.

[22] Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 at 578; Akerhielm v De Mare [1959] AC 789 at 805-806.

[23] The amounts are expressed in $'000s: p 8 of the exhibits to Mr Jinks's affidavit.

[24] Page 6 of the exhibits to Mr Jinks's affidavit.

[27] Jinks affidavit, paragraphs 30-32.