Supreme Court of South Australia

(Civil)

Judgment of The Honourable Justice Debelle

21 April 2006

CONTRACTS – BUILDING, ENGINEERING AND RELATED CONTRACTS – REMUNERATION

Preliminary questions for determination – target estimate contract – dispute as to payment of costs incurred by contractor – whether implied term that costs must be reasonably and properly incurred – whether implied term that costs must be incurred in course of best endeavours performance of contract – whether information and evidence about costs incurred must be provided to the reasonable satisfaction of plaintiff – questions answered.

Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2003) 56 NSWLR 576, discussed.

Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527; Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191; Aquatec-Maxcon Pty Ltd v Minson Nacap Pty Ltd (2004) 8 VR 16; Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513; Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Byrne v Australian Airlines Ltd (1995) 185 CLR 410; Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337; Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288;Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471; Gollin Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455; Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503; L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235; Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181; McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579; Meehan v Jones (1982) 149 CLR 571; Minson Nacap Pty Ltd v Aquatec-Maxcon Pty Ltd (2001) 17 BCL 269; Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451; Prince Albert Pulp Co Ltd v The Foundation Co of Canada Ltd (1976) 68 DLR (3d) 283; Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234; Schenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834; Service Station Association Ltd v Berg Bennett & Associates Pty Ltd(1993) 45 FCR 84; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429, considered.

ONESTEEL MANUFACTURING P/L v UNITED KG P/L

[2006] SASC 119

Civil

1                DEBELLE J.          The issues which fall for determination on this application concern the proper interpretation of a building contract in relation to the payment of what the contract calls “Reimbursable Costs”.

2                On 16 December 2003 the plaintiff OneSteel Manufacturing Pty Ltd (“OneSteel”) and the defendant United KG Pty Ltd (“United”) entered into a contract by which United agreed to perform works to reline and upgrade a blast furnace at the steel works operated by OneSteel at Whyalla.  The contract is contained in a document entitled “Whyalla Blast Furnace Reline Project – Contract Number C4010”.  I will refer to it as “the Contract”.  The Contract is a voluminous document of 936 pages which fills three lever arch folders.  However, for present purposes it is necessary to refer to relatively few of its many and extensive provisions.

3                In order to undertake the works under the Contract, it was necessary to shut down OneSteel’s blast furnace.  As might be expected, OneSteel wished to have the blast furnace shut down for the shortest possible period. Before the Contract was executed, the parties discussed various strategies by which the works should be performed.  In the result the parties executed the contract.

4                The Contract is of a kind called a “Target Estimate Contract”: see Clause 2 of Part 2 of the Special Conditions of Contract.  This means that the Contract is neither a cost plus contract nor a fixed price contract but some kind of tertium quid.  The editor of Hudson’s Building and Engineering Contracts (11th ed) at 3-001 describes a Target Estimate Contract as a “relatively sophisticated modern variant” of a cost plus contract.  Nothing turns on the name Target Estimate Contract.  It is a contract in which the contractor will use his best endeavours to complete the work within what is called the Target Period at an estimated price called the Target Estimate.  The Contract provides for incentives to achieve these goals and disincentives if the goals are not achieved.  The Contract provides for means by which the Target Estimate price and the Target Period can be adjusted.  The Contract has some of the disadvantages of a cost plus contract.  It is, therefore, a contract which is fairly described as a variant of a cost plus contract.

5                In the Contract the Target Period was 65 days and the Target Estimate of the total amount of Reimbursable Costs was $24,682,881 excluding Goods and Services Tax.  The expression “Reimbursable Costs” is defined.  I will deal with it later in these reasons.

6                United has completed the Works.  According to the statement of claim, the blast furnace was shut down on 4 June 2004 and United commenced work.  On 18 August 2004 the blast furnace was relit and was operational later that day.  OneSteel has issued a Certificate of Practical Completion.  Disputes have arisen between OneSteel and United as to the entitlement to recover Reimbursable Costs.  For its part, OneSteel seeks further information from United in relation to those costs.  There is also a dispute as to what is meant by Reimbursable Costs.  In the result, on 6 December 2004 OneSteel commenced an action in this Court seeking to enforce what it believes are its rights under the Contract.

7                The statement of claim alleges that there are disputes as to variations and as to claims for extensions of time.  United claims to be entitled to recover $77,920,331.88 for the Reimbursable Costs incurred in performing the Works.  (The claim is at least $53,000,000 more than the Target Estimate.)  OneSteel says that it has already paid $46,213,118.84.  Thus, the balance of United’s claim is almost $28,000,000.

8                OneSteel claims that it has asked for information from United concerning the Reimbursable Costs claimed by United but that United has failed to comply with its requests.  OneSteel claims that the refusals by United are in breach of Clause 40.2 of the General Conditions of Contract which, shortly stated, requires evidence of amounts due to United.  I will examine Clause 40.2 more closely later in these reasons.  OneSteel claims that the refusal of United to provide the information it seeks prevents it from assessing the proper entitlement of United to be paid.

9                In this action OneSteel seeks a series of declarations as to its entitlement to information and as to the meaning of Reimbursable Costs.  The declarations it seeks are in these terms:

72.    A Declaration that OneSteel is entitled to receive from United KG all information reasonably necessary to enable it to assess the Reimbursable Costs properly incurred by United KG under the Target Estimate Contract;

73.    A Declaration that the Reimbursable Costs to which United KG is entitled to be paid under the Target Estimate Contract are only those direct actual costs that have been reasonably and properly incurred by United KG in performing its obligations under the Target Estimate Contract;

74.    A Declaration that the Reimbursable Costs to which United KG is entitled to be paid under the Target Estimate Contract are only those direct actual costs that have been described and identified in a Progress Payment Claim form or analogous document signed by OneSteel in accordance with the procedure provided for or analogous to that provided for in B1/4;

75.    A Declaration that the Reimbursable Costs to which United KG is entitled to be paid under the Target Estimate Contract are only those direct actual costs with respect to which evidence of the amount due (being that actually paid or payable by United KG) has been provided by United KG to the reasonable satisfaction of OneSteel in accordance with GC40.2;

76.    A Declaration that the Reimbursable Costs to which United KG is entitled to be paid under the Target Estimate Contract are only those direct actual costs which have been incurred as a result of United KG having used its best endeavours to complete the Work as required by the contract for the Target Estimate price and within the Target Period as defined in the contract;

77.    A Declaration that the Reimbursable Costs to which United KG is entitled to be paid under the Target Estimate Contract are only those direct actual costs being costs otherwise recoverable that have not been incurred by United KG as a result of its negligence in the performance of the Work.

78.    Such further or other orders as to the appropriate conduct of these proceedings, including the mode of trial, in light of any orders made pursuant to paragraphs 72 to 77 above, as this Honourable Court deems fit.

As yet, United has not filed its defence.  The reasons for that appear shortly.

10              United applied to strike out the statement of claim on a number of grounds, including that it disclosed no cause of action and was frivolous, vexatious or had a tendency to cause prejudice and embarrassment.  The defendant also applied for an extension of time within which to file its defence.  The application was heard on 30 March 2005.  It quickly became apparent that the resolution of the dispute whether OneSteel was liable to pay the amount claimed by United would be assisted if preliminary questions could be determined concerning the meaning of the expression “Reimbursable Costs” and the extent of the obligation on United to supply information to OneSteel in connection with its claim for Reimbursable Costs.  That was acknowledged by counsel for both parties.

11              The issues which OneSteel seeks to agitate in this action are the kind of issues which lend themselves to determination by a construction summons under Rule 63.01, a procedure which these days is sadly neglected.  It provides a convenient vehicle for determining disputes as to the meaning of documents. The parties commendably agreed that, before any further step was taken in this action, it would be desirable to determine the preliminary questions because they deal with substantive questions which give rise to the dispute between the parties.  Thus, United is for the time being relieved of its obligation to file its defence.

12              The parties have agreed the following questions for determination:

1.      Whether upon the true construction of the contract made between the plaintiff and the defendant on 16 December 2003 (“the Contract”) and, in particular, the definition of “Reimbursable Costs”, the costs which the defendant is entitled to be paid are limited to direct actual costs:

1.1    that have been described and evidenced in a Progress Payment Claim form signed by the plaintiff in accordance with the procedure provided in Clause 4 of Appendix B1 of the Special Conditions;

1.2    that have been incurred as a result of the defendant having used its best endeavours to carry out and complete the Works under the Contract within the Target Period and for less than the Target Estimate price as defined in the Contract;

1.3    that have been reasonably and properly incurred by the defendant in carrying out the Works under the Contract; and

1.4    that have not been incurred by the defendant in the circumstances described in (a) to (e) of the definition of “Reimbursable Costs”.

2.      Whether upon the true construction of the Contract, and in particular Clause 40.2 of the General Conditions of Contract, the defendant was and is obliged, either expressly or by implication, to provide to the reasonable satisfaction of the plaintiff evidence and information as to the Reimbursable Costs claimed by the defendant.

For convenience of reference I have numbered each of the paragraphs.  I ordered that those questions be determined as preliminary questions.

THE CONTRACT

13              In the Contract OneSteel is called “the Company” and United is called “the Contractor”.

14              The Contract is divided into six parts called “Section A” to “Section F”.  For present purposes it is sufficient to refer only to Sections A, B and C.  Clause 7 of Section A of the Contract describes each section and lists what it calls the “Order of Precedence”.  It is in these terms:

The order of precedence of the Contract Documents is the following:

7.1    Section A:  Formal Instrument of Agreement;

7.2    Section B:  Special Conditions;

7.3    Section C:  General Conditions;

7.4    Section D:  Scope of Work (the Scope of Work takes precedence over the drawings included in Section D);

7.5    Section E:  Technical Specifications;

7.6    Section F:  Price Schedule.

Although Clause 7 does not expressly say so, it is apparent that Section A has precedence over Section B, Section B over Section C and so on.  In addition, Clause 7 does not expressly address the situation in which a clause in one section may conflict with a clause in another.  There is nothing to suggest that the rule that general provisions give way to specific provisions should not be followed.  I do not believe that there is any conflict between any provisions relevant to the determination of the above questions.

15              Section B is further divided into Parts 1, 2 and 3, and has a number of Appendices and Schedules.

16              By Clause 2 of Section A of the Contract OneSteel engages United to perform the Works and agrees to pay for those Works:

The Company, in consideration of the Contractor agreeing to perform the Contractor’s obligations, hereby engages the Contractor to undertake the Works in accordance with this Contract, agrees to pay to the Contractor the Contract Sum for the Works in accordance with the terms of this Contract and agreed to perform the Company’s obligations.

By Clause 3 of Section A United agrees to perform the Works:

The Contractor, in consideration of the Company agreeing to perform the Company’s obligations, hereby accepts the engagement referred to in Clause 2, and:

3.1    agrees with and undertakes to the Company that it will complete the Work under the Contract and all of the Contractor’s obligations, in accordance with the terms of this Contract …

Clause 4 of Section A imposes a general undertaking on both OneSteel and United to perform their respective obligations under the Contract:

Each party hereto undertakes to the other party to perform, fulfil, observe, comply with and submit to each and every provision, condition, stipulation and requisition and all matters and things contained, expressed and/or shown in this Contract and by and/or on the part of the respective party to be performed, fulfilled, complied with, submitted to and/or observed.

Special Conditions

17              Section B contains the Special Conditions of Contract.  It begins by setting out the shared objectives of OneSteel and United:

1.      ACKNOWLEDGMENTS, SHARED OBJECTIVES AND INTERPRETATION

1.1    Acknowledgments and Shared Objectives

         The Company and the Contractor agree with and acknowledge to each other, and agree that their shared objectives on entry into this Contract are, as follows:

1.1.1   that the Blast Furnace Reline Project is extremely time critical to the Company and that if the Works are not completed within the Target Period, the Company will incur significant detrimental financial consequences;

1.1.2   that it is critical for the Company to complete the Works for a total cost (excluding the Contractor’s Margin) of no more than the Target Estimate;

1.1.3   that to ensure that the Project is successful and to ensure that the Works will be carried out and completed within the Target Period and completed for less than the Target Estimate, it is essential for the Company, the Contractor and all other consultants and contractors involved in the Project to cooperate, and to coordinate their activities and roles, with each other with the clear purpose and objective of together procuring the completion of the Works within the Target Period and for less than the Target Estimate;

1.1.4   that the best way to achieve the objectives identified in this Clause 1 is for the parties to undertake to each other, and by this Contract they do undertake to each other, to foster and promote a relationship between them and with each consultant and other contractor engaged in connection with and/or involved in, the Project (including the Works), that is open, trusting, non-adversarial, team oriented and of a nature that promotes mutual respect and cooperation;

1.1.5   that the appropriate form of contract to achieve the objectives set out in this Clause 1 is a Target Period/Target Estimate Contract of the type and nature provided for in these Special Conditions;

1.1.6   that in order to achieve the objectives set out in this Clause 1, the Company and the Contractor will use their best endeavours to plan for the carrying out of the Works, including planning for the carrying out of any contingencies and any foreseeable problems, variations and/or Possible Additional Work and planning to overcome any potential delaying events, so that the Works and any variations and/or Possible Additional Work can be completed within, and any delaying events can be overcome so that the works are completed within, the Target Period and without the need for any extension of time;

1.1.7   that unless the Company considers the costs would be excessive and directs the Contractor accordingly, if anything delays the completion of the Works within the Target Period, the Contractor should accelerate the Works in order to complete the Works within the Target Period or, if that is not possible, as soon as possible after the expiry of the Target Period;

1.1.8   that in order to achieve the objectives set out in this Clause 1 the Contractor and the Company will take a reasonable and pragmatic attitude to variations, such that minor variations from the exact wording of the Scope of Work will not be claimed as variations pursuant to clause 39 of the General Conditions.  However the Contractor will be free to claim variations of more than $1500 when the aggregate of such variations reaches $50,000;

1.1.9   that the calculation of the Margin as described in these Special Conditions is illustrated in the matrix attached as Schedule 2.  In the event of any conflict between the Special Conditions and the matrix in Schedule 2, the Special Conditions shall prevail.

Some of those provisions have no greater force than as expressions of the aspirations and intentions of the parties at the time when the Contract was executed.  Nevertheless, they provide a background against which specific obligations in the Contract are to be interpreted.  Clauses 1.1.1 and 1.1.2 express the fact that the time occupied by the Works will be critical for OneSteel and that it will be critical for OneSteel to have the Works completed within the Target Period and at a cost which will not exceed the Target Estimate.

18              The respective obligations of OneSteel and United are set out in Clause 3 of the Special Conditions of Contract, a clause headed “Nature of the Contract”.  It provides:

3.1    Contractor’s Undertaking

In consideration of the Company’s undertakings identified in Clause 3.2 and the agreements, acknowledgements and shared objectives set out in Clause 1 of Part 1 of the Special Conditions, the Contractor undertakes to the Company to carry out the Works and to perform its other obligations under this Contract in accordance with the terms of this Contract and to use its best endeavours to carry out and complete the Works within the Target Period and to do so for a total Reimbursable Cost to the Company of less than the Target Estimate.

3.2    Company’s Undertaking

In consideration of the Contractor’s undertakings identified in Clause 3.1 and the agreements, acknowledgments and shared objectives set out in Clause 1 of Part 1 of the Special Conditions, the Company undertakes to perform its obligations under this Contract in accordance with the terms of this Contract and to pay the Contractor the following amounts determined pursuant to, and at the times provided for, in this Contract:

3.2.1   the Reimbursable Costs;

3.2.2   the Margin; and

3.2.3   the Fee referred to in Clause 8.

19              Clause 10, and especially Clause 10.2 of the General Conditions of Contract (Section C of the Contract) reflects some of what is contained in Clause 3 above and in the Acknowledgements and Shared Objectives as expressed in Clause 1.  I refer to Clause 10.2 but will not repeat its terms.  Clause 10.2.1 refers to what the Contract calls “the Preparation Time” in which United is to plan for and program the intended Works.  Clause 10.2.2 states that the objectives stated in Clause 10.2.1 “are of paramount importance and the parties agree to cooperate with each other to the fullest extent possible in order to achieve the stated objectives”.  Reference should also be made to the warranties expressed in Clause 10.3 of the General Conditions of Contract.

20              It is also important to note the terms of Clause 1.2 of the Special Conditions of Contract.  It reads:

1.2    Interpretation

This Contract and its terms must be interpreted in the context of the agreements, acknowledgments and shared objectives set out in Clause 1.1 and of the terms set out in the balance of Part 1 of the Special Conditions.

Thus, to the extent that the answers to the questions require an interpretation of the Contract, it is necessary to interpret the Contract according to the instruction in Clause 1.2.

21              The intent that the Works should be completed within the Target Period and at a cost no more than the Target Estimate is re‑inforced by the fact that the Contract provides for incentives for United to complete the Works within the Target Period and for the Target Estimate, and disincentives if it does not.

Adjustment of Target Estimate

22              The Contract also provides that both the Target Period and the Target Estimate may be adjusted.  The provisions relating to adjustment are expressed in Clause 5 of the Special Conditions.  Clause 5.3 provides for adjustment of the Target Period.  Clause 5.2 provides for adjustment of the Target Estimate. Clause 5.2 lists 19 kinds of factors which may lead to an adjustment of the Target Estimate.  In summary form they are:

5.2    Adjustment of the Target Estimate

For the purposes of calculating the Margin to be paid to the Contractor by the Company pursuant to this Contract, the Target Estimate is fixed and will not be adjusted on any basis or ground except by adjusting the Target Estimate by the amount of the direct costs incurred or saved because of:

5.2.1      increases in the cost of the Works due to cost of carrying out the Possible Additional Works as directed by the Company’s Representative;

5.2.2      increases or decreases in the cost of the Works, due to variations directed or approved pursuant to clause 39 of the General Conditions …

5.2.3      increases in the cost of carrying out the Works due to inclement weather …

5.2.4      increases or decreases in the cost of labour on the site pursuant to any industrial agreements …

5.2.5      increases in the cost of carrying out the Works due to industrial action;

5.2.6      increases in the cost of carrying out the Works arising from any incident or requirement involving the safety of workers on the site …

5.2.7      the additional costs incurred in removing iron which remains in the Blast Furnace after it is shut down …

5.2.8      the additional costs incurred due to a delay beyond the Start Date by the Company in giving the Contractor access to the Blast Furnace …

5.2.9      the additional costs incurred by the Company bringing forward the Start Date;

5.2.10    the additional costs incurred due to encountering a sub-surface condition …

5.2.11    the additional costs incurred due to a delay in the carrying out of the Works because of a failure by the Company to provide utility services or a breakdown in equipment …

5.2.12    the additional costs incurred due to a breach of contract by the Company;

5.2.13    the additional costs incurred due to the Company’s Representative directing acceleration of the Works …

5.2.14    the additional costs incurred due to loss or damage to the Works …

5.2.15    the additional costs incurred due to suspension of the Works by the Company …

5.2.16    the additional costs incurred in resolving any significant ambiguity, error, omission in, or conflict or discrepancy between any of the documents provided by the Company …

5.2.17    the cost of reinstating any utility services damages by the Contractor …

5.2.18    the cost of compliance with the Statutory Requirements in clause 18.1 of the General Conditions …

5.2.19    the additional costs incurred due to a suspension of the Works where a party has invoked a force majeure …

23              Clause 5.5 provides for incentives to United to complete the Works within the Target Period or earlier.  If completed within the Target Period, OneSteel is to pay United $3 million, what the Contract calls “the Base Margin”.  If the Works are completed before the last day of the Target Period and the Reimbursable Costs are less than or equal to the Target Estimate, a bonus is to be added to the Base Margin and is to be fixed by a formula set out in Clause 5.5.1.  If, however, the Works are completed after the Target Period (as adjusted) has expired, the Margin is to be reduced by a formula set out in Clause 5.5.1.  Provision is also made for an increase in the Base Margin if the Reimbursable Costs are within certain limits.  Should the Reimbursable Costs exceed the stated limits, the Base Margin will be reduced by a formula set out in Clause 5.5.2.  Shortly stated, the Contract provides financial incentives to United to complete the Works within the Target Period and for less than the Target Estimate, and financial disincentives if it fails to do so.  I have mentioned these incentives and disincentives for completeness.  Nothing turns on the precise terms of Clause 5.5.

Reimbursable Costs

24              Reimbursable Costs are defined in Clause 2 of the Special Conditions of Contract in these terms:

“Reimbursable Costs” means the direct actual costs incurred by the Contractor in carrying out the Works, variations, Possible Additional Work and work in connection with the Project in addition to the Scope of Work, including the direct costs of materials, labour, preliminaries, subcontracts and management of the Works which Reimbursable Costs are defined in more detail in Schedule 1 hereto (but such definition does not provide an exhaustive description of Reimbursable Costs), but excluding

(a)     all offsite overheads and profit;

(b)     direct actual costs incurred by the Contractor arising from an incident or requirement involving the safety of workers on the site, where such incident was caused or contributed to (but only to the extent of the contribution) by the negligence of the Contractor and/or its servants, agents and/or contractors;

(c)     direct actual costs incurred by the Contractor arising from industrial action that was caused or contributed to (but only to the extent of the contribution) by the negligence of the Contractor and/or its servants, agents and/or contractors;

(d)     direct actual costs incurred by the Contractor in the rectification of defective work, where such defective work was caused or contributed to (but only to the extent of the contribution) by the negligence of the Contractor and/or its servants, agents and/or contractors;

(e)     direct actual costs incurred by the Contractor arising from the negligence of the Contractor or its servants, agents and/or contractors in the performance of the Work, not including the negligence described in clauses (b) – (d) above, but only to the extent of the Contractor’s contribution to such costs.

It will be noticed that the definition states that the Reimbursable Costs are defined in more detail in Schedule 1 of the Special Conditions of Contract.  Schedule 1 is in these terms:

The Reimbursable Costs for which the Company will reimburse the Contractor are the direct costs of materials, labour, preliminaries, subcontractors and management of the Works, but excluding all offsite overheads and profit.  Reimbursable Costs include the following categories of costs incurred by the Contractor in connection with the performance of the Works:

1.      Construction Personnel

  • Direct labour (including statutory and add-on costs, as set out in the Price Schedule)
  • Indirect labour, that is, construction personnel not employed by UKG, such as subcontractors (including statutory and add-on costs, as set out in the Price Schedule)
  • Terminations and redundancies specific to the project.

2.      Other Than Construction Personnel  

2.1    CITB Levy

2.2    Government Fees and Charges

2.3    Site Office including temporary office at Jessop Street, Whyalla

  • Courier services to and from site
    • All site office costs including cleaning, stationery, faxes, photocopiers, photocopying, landlines, internet, power/water/communications services not provided by client
    • All costs to service site crib rooms and ablutions
    • All costs related to supervisor’s/site management vehicles
    • Whyalla accommodation/messing for job related personnel including meals & accommodation for management in separate Whyalla facilities (eg housing/motels etc)
    • Procurement & Logistics for the job

2.4    Constructional Plant and Equipment

2.5    Site Management and Security

2.6    Waste Management

2.7    Cranage and Lifting

2.8    Small Tools

2.9    Safety Facilities, Training Equipment and Clothing

3.      Materials

4.      Subcontracts

5.      The Possible Additional Work in Schedule 3

The definition in Schedule 1 must be read as being subject to the definition in Clause 2 of the Special Conditions.

Principles of Interpretation

25              When determining the rights and liabilities of parties to a contract, the court acts objectively, having regard to the expressed intention of the parties.  That principle has been frequently expressed by the High Court and was most recently affirmed in Pacific Carriers Ltd v BNP Paribas (2004) 218 CLR 451 at [22] and in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165 at [40].  See also Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 at [34].  In Toll at [40] the court said:

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.

The Court must ascertain the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract: Maggbury Pty Ltd v Hafele Australia Pty Ltd (2001) 210 CLR 181 at 188 per Gleeson CJ, Gummow and Hayne JJ.

26              Like any other contract, the court must read the contract as a whole: L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235.  If the words are clear and fairly susceptible to one meaning only, the court must give effect to those words: Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (1973) 129 CLR 99, per Gibbs J at 109.  Where a clause is open to two constructions, the court will construe it so as to avoid consequences which appear capricious, unreasonable, inconvenient or unjust. Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (supra), per Gibbs J at 109; Australian Casualty Co Ltd v Federico (1986) 160 CLR 513 at 520.  The court must give commercial efficacy to the contract and the obligations contained in it.  These principles were summarised by Gibbs J in Australian Broadcasting Commission v Australasian Performing Rights Association Ltd (supra) at 109 ‑ 110 in these terms:

It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied.  Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.  If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different.  The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust.  On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, “even though the construction adopted is not the most obvious, or the most grammatically accurate”, to use the words from earlier authority cited in Locke v Dunlop, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley’s Case. Further, it will be permissible to depart from the ordinary meaning of the words of one provision so far as is necessary to avoid an inconsistency between that provision and the rest of the instrument.  Finally, the statement of Lord Wright in Hillas & Co Ltd v Arcos Ltd, that the court should construe commercial contracts “fairly and broadly, without being too astute or subtle in finding defects”, should not, in my opinion, be understood as limited to documents drawn by businessmen for themselves and without legal assistance (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd).  (Citations omitted)

Regard will be had to the surrounding circumstances if the language of the contract is ambiguous or susceptible to more than one meaning but it is not permissible to contradict the plain meaning of the words used: Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352 – 353.  InSchenker & Co (Aust) Pty Ltd v Maplas Equipment and Services Pty Ltd [1990] VR 834 at 837 McGarvie J, with whom Kaye and Ormiston JJ agreed, said:

A contract is to be construed in the light of the surrounding circumstances existing and known to the parties when the contract was made: Butt v Long (1953) 88 CLR 476, at pp 486 – 7 and 490.  This includes the genesis of the transaction, the objective framework of facts within which the contract came into existence and the commercial purpose of the parties, in the objective sense of what reasonable persons would have in mind in their situation: Codelfa (1982) 149 CLR 337, at pp 347 – 53.

The essential question is, what would reasonable business people in the position of the parties have taken the clause to mean: Schenker at 838.

27              It is well settled that, when interpreting a commercial contract, the court will not adopt a narrow, technical or artificial interpretation of the words used in that contract.  So in Cohen & Co v Ockerby & Co Ltd (1917) 24 CLR 288 at 300, Isaacs J said:

…the expressions, and particularly any elliptical expressions, in a mercantile contract are to be read in no narrow spirit of construction, but as the Court would suppose two honest business men would understand the words they have actually used with reference to their subject matter and the surrounding circumstances.

In Hillas & Co Ltd v Arcos Ltd (1932) 147 LT 503 at 514, Lord Wright said that the court should construe commercial contracts “fairly and broadly, without being too astute or subtle in finding defects”.  To like effect are the observations of Barwick CJ in Upper Hunter County District v Australian Chilling & Freezing Co Ltd (1968) 118 CLR 429 at 437:

In the search for that intention, no narrow or pedantic approach is warranted, particularly in the case of commercial arrangements.

The interpretation of the contract must accord with business commonsense:  Antaios Compania Naviera SA v Salen Rederierna AB [1985] AC 191 at 201 per Lord Diplock, with whom the other members of the House of Lords agreed. Lord Diplock said:

If detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.

More recently in McCann v Switzerland Insurance Australia Ltd (2000) 203 CLR 579, Gleeson CJ and Kirby J each expressed views on the interpretation of commercial contracts.  The court was dealing with a contract of insurance which is but one form of commercial contract.  Gleeson CJ said at [22]:

A policy of insurance, even one required by statute, is a commercial contract and should be given a businesslike interpretation.  Interpreting a commercial document requires attention to the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.  (Citations omitted).

Kirby J said that questions of meaning are:

…to be answered in a practical and realistic way, not in a way which adopts an overly fine or theoretical approach that is alien to commercial agreements.

To put the position shortly, the interpretation must be commercially sensible and accord with commercial reality or, as was said in Gollin Co Ltd v Karenlee Nominees Pty Ltd (1983) 153 CLR 455 at 464, must accord with “commercial efficacy or common sense”.

QUESTION 1

28              I will deal first with Question 1.3 and then with Questions 1.2 and 1.4.  It is convenient to deal with Question 1.1 last as it deals with procedural issues.  The other questions directly concern the meaning of Reimbursable Costs.

Questions 1.2 and 1.3

29              Question 1.2 asks whether Reimbursable Costs are limited to direct actual costs that have been incurred as a result of the defendant having used its best endeavours to carry out and complete the Works under the Contract within the Target Period and for less than the Target Estimate as defined in the Contract.

30              Question 1.3 asks whether Reimbursable Costs are limited to direct actual costs that have been reasonably and properly incurred by the defendant in carrying out the Works under the Contract.  It will be convenient to consider Question 1.3 first.  Before doing so, I note some general principles.

31              Shortly stated, the effect of OneSteel’s contentions is that it is an implied term of the Contract that Reimbursable Costs should be confined to those costs which have been reasonably and properly incurred.  OneSteel also contends that the definition of Reimbursable Costs should reflect the undertaking of United in Clause 3.1 of the Special Conditions of Contract “to use its best endeavours to carry out and complete the Works … for a total Reimbursable Cost to the Company of less than the Target Estimate”.  For its part, United contends that OneSteel’s argument is contrary to the principles relating to the implication of terms into a written contract and, further, that there is no necessity for either of those terms to be implied in the Contract.  According to United, the parties have clearly defined Reimbursable Costs in such a way that those implied terms should not be included.

Implied Terms

32              OneSteel seeks to imply terms, not as a matter of law, but to give business efficacy to the Contract.  That is a process which, as Gummow J notes in Service Station Association v Berg Bennett & Associates Pty Ltd (1993) 45 FCR 84 at 89 is somewhat strictly regulated by High Court authority.  I have referred to the decisions Gummow J has there mentioned.  For present purposes, it is sufficient to note Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 per Mason J at 346 – 347 and BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 at 26, later reported as 180 CLR 266 at 283.  As Mason J noted in Codelfa at 346, courts are, for obvious reasons, slow to imply a term into a written contract.  The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question in issue.  It is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract.  At 347 Mason J adopted the conditions necessary to ground an implied term as expressed by the majority of the Judicial Committee of the Privy Council in BP Refinery (Westernport) v Pty Ltd v Shire of Hastings (supra) at 283:

For a term to be implied, the following conditions (which may overlap) must be satisfied:

1.      it must be reasonable and equitable;

2.      it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

3.      it must be so obvious that “it goes without saying”;

4.      it must be capable of clear expression;

5.      it must not contradict any express term of the contract.

A term will not be implied for reasons of business efficacy if the contract is capable of operating reasonably and effectively in the absence of such a term: Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 423.

33              The implication in contracts of what is reasonable runs throughout the whole of modern law in relation to business contracts: Hillas & Co Ltd v Arcos Ltd (supra) per Lord Wright at 517.  Subject to the terms of the contract, the principle is no less applicable to building contracts which are but one form of commercial contract.  Terms as to reasonableness are implied in a number of kinds of contract.  Some examples are listed in Carter on Contract at 11-140.  As Gummow J noted in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (supra) at 94, there are a number of cases where an obligation to act reasonably and in good faith is implied as a term to give business efficacy to a contract which otherwise would be apt to fail for uncertainty.  Examples are loosely drafted terms in vendor and purchaser contracts as to the provision of finance: for example, Meehan v Jones (1982) 149 CLR 571, and in leases as to the fixing of the rent by the nominee of a third party: Booker Industries Pty Ltd v Wilson Parking (Qld) Pty Ltd (1982) 149 CLR 600.

34              Gummow J also pointed out that where one party has an express power, the exercise of which will significantly affect the interests of the other party (for example, by cancellation of their supply contract), if the holder of the power is satisfied that a certain state of affairs exists, the words of the contract are fairly readily construed as requiring a reasonable as well as honest state of satisfaction.  See the authorities referred to by Priestley JA and Handley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 260, 279 – 280, and see also Amann Aviation Pty Ltd v Commonwealth (1990) 22 FCR 527 at 532, 542 – 543, and on appeal in the High Court, Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 95 – 97.  But, as Gummow J noted, this is a result arrived at by a process of construction of the express terms in the setting of the contract as a whole.  It is best not seen at all as the implication of a further term.  In this respect one is reminded of the observation of Priestley JA in Renard Constructions at 255 that questions of construction and different kinds of implication tend to blur together.

35              In Renard Constructions at 262 – 263 Priestley JA referred to the decision of Dixon J in Gullett v Gardner which is noted in (1948) 22 ALJ 151.  Priestley JA supplemented the note in the Australian Law Journal by reference to the original typescript of the judgment in the archives of the High Court.  Dixon J set out the process to be undertaken when implying a term to give business efficacy to a contract in these terms:

This appeal depends upon the interpretation that should be placed upon a transaction of a somewhat curious nature between the two parties, the plaintiff and the defendant.  It depends upon its interpretation in the wide sense; not the mere construction of the language in which it is expressed, but the extraction from the documents and the circumstances to which they refer and in which they were made of the full intention which the parties had or are to be considered as having with reference to the question now arising from the events that have occurred.  (Emphasis added)

Later, Dixon J added:

Implications are made because they appear almost inevitably to spring from the situation the parties have expressly created.  They are the logical inference from the stipulations contained in an agreement or from the terms in which it is expressed.  The inference that the parties must have intended to bind themselves in the manner sought to be implied should arise from the circumstances and from the contract as a rational deduction of such cogency that another intention can hardly be supposed.  The intention is to be gathered from what they have said and done, and concerns what each party to the contract had the right to expect, but it does not necessarily mean an enquiry into their actual mental state.  The question is one of interpretation in the sense of ascertaining the full scope and bearing of their contractual intent.  In such a question it is not only permissible, it is requisite to consider the circumstances in which the parties contracted.

This approach is reflected in the terms of Clause 1.2 of the Special Conditions of Contract.  It will be recalled that Clause 1.2 provides that the Contract and its terms must be interpreted in the context of the agreements, acknowledgements and shared objectives set out in Clause 1.1 of the Special Conditions of Contract and of the terms set out in the balance of Part 1 of the Special Conditions of Contract.  Thus, the question whether a term is to be implied is to be determined by ascertaining the full scope and bearing of the contractual intent of the parties from the Contract and the circumstances to which the Contract refers, namely, the completion of these Works within the Target Period and for the Target Estimate price.

36              As a matter of general principle and ordinary commercial common sense, it is quite obvious that, in the absence of a clear expression to the contrary, a provision in a building contract which entitles the contractor to be reimbursed for costs incurred will be subject to an implied term that the cost will be reasonably and properly incurred.  In the absence of such a provision, the building owner has an entirely open‑ended obligation or, looking at the other side of the coin, the contractor has been handed a blank cheque.  Such a contract would put a premium on inefficiency and extravagance.  There would be no proper accountability for incompetent or unnecessary work.  There are, I think, compelling reasons why it is proper to imply a term that Reimbursable Costs should be reasonably and properly incurred.

37              In addition, the power of a contractor in a building contract to incur costs is a power the exercise of which will significantly affect the interests of the building owner, that is to say, it is a power of a similar kind to that to which Gummow J referred in Service Station Association Ltd v Berg Bennett & Associates Pty Ltd (supra) at 94.  For that reason also, it is a power which should be exercised so that the costs are reasonably incurred.  These are all compelling reasons why the power of United to incur Reimbursable Costs must be exercised reasonably.

38              I think this is an instance of a term being implied to give business efficacy to the Contract.  It is a term which satisfies all of the tests in BP Refinery (Westernport).  Even if it is not, it is an instance of construing a power in the context of the Contract as a whole.  By either route the same result is reached.

39              Two respected texts on building contracts also express the view that the power to incur costs must be exercised reasonably.  In Hudson’s Building & Engineering Contracts (11th ed) at 3.045 in the context of a discussion on contracts on a cost plus basis the following sentence occurs:

The principle objection to such contracts is the greatly reduced incentive to economy or speed of construction, since no really effective sanctions to force these can be provided, although no doubt terms will be implied in almost all such contracts, preventing payment for wasteful or uneconomic use of labour, materials or plant, and for due diligence in carrying out the work.

Later, at 4.130 in a discussion as to obligations as to costs the following appears:

Clearly in a price contract, where the cost of carrying out the contract work by the contractor will not be of relevance to the owner, no contractor’s obligation in regard to costs would exist; but in cost‑reimbursable contracts there will, even in the absence of express provisions, be an obvious need for an implied term limiting the contractor’s entitlement under the contract to such costs of carrying out the work as have been reasonably incurred by him and without fault on his part, that is, an obligation of reasonable competence and economy in carrying out the work.

The authority relied on for those propositions is a decision of the Supreme Court of Canada in Prince Albert Pulp Co Ltd v The Foundation Co of Canada Ltd (1976) 68 DLR (3d) 283, which concerned a major contract to construct a substantial pulp mill.  It was a cost plus contract.  The Supreme Court held that the building owner was not precluded from offsetting against the amount due for the work done the excessive cost of the work.

40              To the same effect is a passage in Keating on Building Contracts (7th ed) at 421 which reads:

Cost Plus Percentage Contracts         Such contracts sometimes contain an elaborate description of the method of calculating the cost.  Where they do not and there is a simple agreement to pay a percentage upon the cost of labour and materials, “cost” means, it is submitted, the actual cost honestly and properly expended in carrying out the works.  The contractor is not, it is submitted, disentitled from such cost merely because it exceeds what was anticipated.  But it is thought that there would normally be an implied term that the contractor would carry out the works with reasonable economy so that expenditure in excess of what was reasonable would be irrecoverable.  It would be a question of fact and degree in each case.  A formally drafted costs plus contract will usually have a clause intended to protect an employer against waste or extravagance on the part of the contractor.

The Contract contains no clause of a kind mentioned in the last sentence of that extract.  OneSteel will be protected from waste or extravagance only if a term is implied that the Reimbursable Costs should be reasonably and properly incurred.

41              This contract contains a number of references to the objective of completing the works for no more than the Target Estimate.  Examples are Clauses 1.1.2, 1.1.3, and 3.1.  It also requires United to program and plan the carrying out of the Works to avoid foreseeable problems, variations, additional work and delay: Clauses 1.1.6 in the Special Conditions of Contract and Clause 10.2 in the General Conditions of Contract.  The Contract provides United with what it calls “Preparation Time” to enable it to prepare for the execution of the Works.  It is relevant to note that, in addition to references to completing the Works for a cost equal to or less than the Target Estimate in the Special Conditions of Contract, by Clause 10.3.16 and 10.3.18 United warrants that the Target Estimate provides a reasonable and adequate cost allowance for the execution of the Works.  Those clauses are in these terms:

10.3.16  that it has reviewed in detail the Target Estimate along with its planning for and programming of the execution and carrying out of the Works and that the Target Estimate provides a reasonable and adequate cost allowance for the execution and carrying out of the Works by the Date for Practical Completion and otherwise in accordance with the requirements of this Contract;

10.3.18  that it has worked up a comprehensive budget against the Scope of Work and managed the cost system to show all Reimbursable Costs and has in place a system to track variations to the budget and produce detailed and accurate forecasts for the whole of the Works and any part of the Works, such system to be in place for the duration of the Contract and be available for audit/interrogation by the Company or its nominated independent auditor.  The information from this system to be available at meetings and at any other times reasonably requested by the Company.

The warranties in Clause 10 of the General Conditions do not detract from the warranties in the Special Conditions: Clause 10.4.

42              Another clause indicating an intention to keep costs to a reasonable level is Clause 1.1.7 which permits United to accelerate the works and to complete them within the Target Period unless OneSteel considers that the cost would be excessive and directs United accordingly.  There are also a number of provisions by which the company is able to decide whether particular work should be done.  They relate to an acceleration of the Works (Clause 1.1.7) and Additional Works (Clause 7 of the Special Conditions).  Those clauses signify an intention to limit costs to reasonable costs.

43              When all of these provisions are read together, they indicate that OneSteel seeks to contain costs, notwithstanding that United is entitled to apply to adjust the Target Estimate.  In short, the intention is to keep costs within reasonable bounds.

44              I have had regard to the fact that time was a critical factor in this Contract.  It was fundamentally important to OneSteel that its blast furnace should be shut down for the shortest possible time.  That might suggest that United was at liberty to incur whatever costs were necessary in order to complete the Works within the Target Period.  However, that is not what the terms of this Contract expressed.  Instead, the Contract shows that United had the Preparation Time to plan and program its Work, that United fixed the Target Estimate Price, and that United warranted that it could complete the Works for that price. OneSteel did not give United a blank cheque.  Instead, the contractual provisions already mentioned show the intent that costs were to be reasonably incurred.

45              For these reasons I accept the submission of OneSteel that, if United was entitled to recover costs not reasonably and properly incurred, this would be inconsistent with the stated objectives of the Contract and the other terms as to costs in the Contract.  It would allow United to operate in a manner inimical to the achievement of the objectives and would not reflect the intentions of the parties as expressed in the objectives stated in the Contract.  It might be added rhetorically, why include all of the provisions relating to costs if costs are not to be reasonably incurred?  In short, the conclusion that there is an implied term that the Reimbursable Costs should be reasonably and properly incurred is required by both a consideration of principles of commercial common sense as well as by the terms of the Contract.

46              The provisions relating to the adjustment of the Target Estimate do not tell against that conclusion.  Instead, the provisions of Clause 5.2 recognise that events will occur in the course of the Works for which United is entitled to be compensated for increases in costs.  They include variations, delays, and additional work.  Indeed, the fact that Clause 5.2 expressly provides for the ability to reduce the Target Estimate by “the amount of the direct costs … saved” only serves to emphasise that, while the Target Estimate may be increased, there is equally an intention to reduce it if at all possible.  This re‑inforces the view that Clause 5.2 does not tell against the conclusion.  Similarly, the provisions in Clause 5.5 relating to calculation of the Margin, with its incentive for completing the work at a cost within the Target Estimate and disincentives for completing at a cost in excess of the Target Estimate, re‑inforce the conclusion.

47              Neither the fact that Reimbursable Costs are defined as “direct actual costs incurred by the contractor” in carrying out its obligations under the Contract as spelled out in the definition of Reimbursable Costs in Clause 2 of the Special Conditions nor the fact that Reimbursable Costs are defined in Schedule 1 of the Special Conditions as direct costs militates against the conclusion that Reimbursable Costs must be reasonably and properly incurred.  Unless there is a constraint of reasonableness, OneSteel would have an open‑ended liability for those costs.

48              The expression “properly incurred” signifies that the costs have been incurred in accordance with the Contract.  Costs which have been reasonably incurred will be costs which have been properly incurred.  For all of these reasons, it is proper to imply a term in the Contract that the definition of Reimbursable Costs in Clause 2 of the Special Conditions of Contract means direct actual costs which have been reasonably and properly incurred by the Contractor in carrying out the different kinds of Work listed in the definition.  A like term will be implied in Schedule 1 of the Special Conditions of Contract.

49              It was not submitted that an implied term of this kind would impose any onerous obligation on United.  Indeed, it is difficult to understand how it could.  There might have been occasions in the performance of the Works where United had to adopt an expensive method of performing certain work which might have been less expensive but for the obligation to complete the work within the Target Period.  That does not necessarily mean that the cost was neither reasonably nor properly incurred.  In order to demonstrate that the cost was reasonably and properly incurred, United would have to establish no more than how the obligation to complete within the Target Period required the work to be done in that way.

Question 1.2

50              Question 1.2 effectively asks if Reimbursable Costs are limited to direct actual costs that have been incurred as a result of the defendant having used its best endeavours to carry out and complete the works under the Contract within the Target Period and for less than the Target Estimate Price as defined in the Contract.  This question is clearly grounded on the terms of Clause 3.1 of the Special Conditions of Contract.  It is convenient to repeat the terms of Clause 3.1:

3.1    In consideration of the Company’s undertakings identified in Clause 3.2 and the agreements, acknowledgments and shared objectives set out in Clause 1 of Part 1 of the Special Conditions, the Contractor undertakes to the Company to carry out the Works and to perform its other obligations under this Contract in accordance with the terms of this Contract and to use its best endeavours to carry out and complete the Works within the Target Period and to do so for a total Reimbursable Cost to the Company of less than the Target Estimate.

By that clause United undertook what are effectively two obligations.  The first was to carry out the Works and to perform its obligations in accordance with the terms of the Contract.  The second was to use its best endeavours to complete the Works within the Target Period and for Reimbursable Costs of less than the Target Estimate.  Those two obligations have to be understood against the acknowledgments and shared objectives set out in Clause 1 of Part 1 of the Special Conditions of Contract.

51              There is plainly room for tension between the obligations to complete the Works within the Target Period and at a cost equal to or less than the Target Estimate.  The goal or objective of completing the Works within the Target Period may require the costs to exceed the Target Estimate.  That fact must, however, be weighed against the fact that United had the Preparation Time to assess the nature and extent of the works to be performed.  However, it is unnecessary to stay with this issue.

52              Clause 3.1 is not the only provision in the Contract relating to Reimbursable Costs.  This is not a fixed price contract.  Although United had the objective of completing the works within the Target Period and for a cost equal to or less than the Target Estimate and although there are incentives to encourage United to achieve that objective, the Contract expressly provides for adjustments of the Target Estimate.  Reference has already been made to Clause 5.2 which provides a long list of grounds on which the Target Estimate might be adjusted.  Other relevant clauses are Clauses 1.1.6, 1.1.7 and 1.1.8 and Clauses 7 and 8 of the Special Conditions of Contract.  It is convenient to quote Clause 1.1.8:

1.1.8   that in order to achieve the objectives set out in this Clause 1 the Contractor and the Company will take a reasonable and pragmatic attitude to variations, such that minor variations from the exact wording of the Scope of Work will not be claimed as variations pursuant to clause 39 of the General Conditions. However the Contractor will be free to claim variations of more than $1500 when the aggregate of such variations reaches $50,000;

Indeed, the Contract contains an extensive number of provisions which all qualify and are relevant to the quantification of and the recoverability of Reimbursable Costs.  They all qualify Clause 3.1 to a significant degree.

53              More importantly, given the implied term that Reimbursable Costs should be reasonably and properly incurred, it is otiose to add imply a further term of the kind mentioned in this question.  If United has reasonably and properly incurred a cost, it will have discharged any obligation to use its best endeavours.

54              For these reasons, there is no basis for seeking to qualify the definition of Reimbursable Costs as being limited to direct actual costs incurred as a result of the defendant having used its best endeavours to carry out and complete the works under the Contract within the Target Period for less than the Target Estimate.

Question 1.4

55              This question asks whether the definition of Reimbursable Costs is limited to direct actual costs that have not been incurred by the defendant in the circumstances described in Paragraphs (a) to (e) of the definition of “Reimbursable Costs”.

56              The definition of Reimbursable Costs in the Special Conditions of Contract itself excludes from Reimbursable Costs costs of the kind described in Paragraphs (a) to (e).  This is implicit in the question.  Clearly such costs are excluded and there was no submission by United to the contrary.

Question 1.1

57              It is now convenient to return to this question.  It concerns what might be described as a procedural requirement.  It asks whether the definition of Reimbursable Costs in the Special Conditions of Contract is limited to direct actual costs that have been described and evidenced in a Progress Payment Claim Form signed by OneSteel in accordance with the procedure provided in Clause 4 of Appendix B1 of the Special Conditions.

58              When considering this question, it is necessary to have regard to the provisions of the Contract relating to the kinds of claims for payment which might be made by United.  They are provided in Clause 40 of the General Conditions of Contract.  It prescribes four kinds of payments.  The first is prescribed by Clause 40.1.  It is for advanced payments by OneSteel.  That kind of payment is irrelevant for present purposes.

59              Clause 40.2 provides for three kinds of claims for payment.  They are claims for progress payments, the Final Reimbursable Costs Claim made after the issue of a Certificate of Practical Completion, and the Final Payment Claim.  It is convenient to set out the terms of Clause 40.2 and the other relevant provisions in Clause 40.  I first deal with Clause 40.2.  It provides:

40.2  Payment Claims and Payment

At the times for payment claims stated in Annexure “A”, upon issue of a Certificate of Practical Completion, and within the time prescribed for the Final Payment Claim, the Contractor shall deliver to the Company’s Representative claims for payment supported by evidence of the amount due to the Contractor and such information as the Company’s Representative may require.

The payment procedure in the Special Conditions shall apply.

Payment of monies shall not be evidence of the value of Work, an admission of liability, or that the Work has been executed satisfactorily but shall be a payment on account only.

Clause 4 of Part 2 of the Special Conditions of Contract complements the provisions of Clause 40.  It provides:

Further to GCC Clause 40, the Contractor shall comply with the Progress Payment Claim Procedure set out in Appendix B1 of this section.

It therefore imposes an obligation in addition to that imposed in Clause 40 and requires claims for progress payments to be made in accordance with the procedures in Appendix B1 to the Special Conditions of Contract.  For the purposes of determining this question, is it not necessary to refer to the terms of Appendix B1, other than to note Clause 2 which provides that payments “shall be made under Clause 40 of the General Conditions of Contract providing the following instructions have been carried out.”  The balance of Appendix B1 sets out the procedures for making claims for progress payments.

60              It should be noted that “the time for payment claims” which is stated in Annexure A are the 25th day in each month.  Appendix B1 requires claims for progress payments to be lodged on the 22nd day in each month.  In my view, nothing turns on those different times.

61              The first part of Clause 40.2 clearly refers to claims for progress payments.  Given the short period in which the Works were performed, there would have been only two or three claims for progress payments.  As is apparent from the terms of Clause 40, the reference in Clause 40.2 to payment of claims “upon issue of a Certificate of Practical Completion” refers to the Final Reimbursable Costs Claim, and the reference to claims “within the time prescribed for the Final Payment Claim” is a reference to the Final Payment Claim.  I set out the other relevant provisions of Clause 40.  Clause 40.3 provides:

40.3  Calculation of Payment

Subject to the succeeding provisions of this Clause 40, the amount due to the Contractor at the time for a claim for payment shall be:

40.3.1   the Reimbursable Costs incurred but not previously paid to the Contractor; …

[The remaining part of this clause is irrelevant.]

40.4  Retention Monies

[This clause is not relevant for present purposes.]

40.5  Unfixed Plant and Materials

[This clause is not relevant for present purposes.]

40.6  Certificate of Practical Completion

The Contractor shall give the Company’s Representative 14 days written notice of the date upon which the Contractor anticipates that Practical Completion will be reached.

When the Contractor is of the opinion that Practical Completion  has been reached, the Contractor shall request the Company’s Representative to issue a Certificate of Practical Completion.  Within 14 days after receipt of the request the Company’s Representative shall give to the Company and to the Contractor a Certificate of Practical Completion stating the Certified Date of Practical Completion or give the Contractor written reasons for not issuing the certificate.

The issue of a Certificate of Practical Completion shall not constitute approval of any Work under the Contract, nor shall it prejudice any claim by the Company.

40.7  Final Cost Forecast

Within 30 days of Practical Completion the Contractor shall provide the Company a final forecast of the cost of the Work.

40.8  Final Reimbursable Costs Claim

Within 56 days of Practical Completion the Contractor shall lodge with the Company’s Representative a final Reimbursable Costs claim and endorse it “Final Reimbursable Costs Claim”.

After the expiration of the period for lodging the Final Reimbursable Costs Claim any claim that the Contractor should have made for Reimbursable Costs and has not made (save and except for Reimbursable Costs incurred in rectifying defective work during the Defects Liability Period) shall be barred, unless the Contractor has requested the Company’s Representative grant an extension to the period for lodging the Final Reimbursable Costs Claim.

40.9  Final Payment Claim

Within 28 days after the expiration of the last of:

40.9.1   the Defects Liability Period; or

40.9.2   where there is more than one Defects Liability Period (including any extended Defects Liability period under Clause 43), the last to expire,

40.9.3   the Contractor shall lodge with the Company’s Representative a final payment claim and endorse it “Final Payment Claim”.

The Contractor shall include in that claim all monies that the Contractor considers to be due from the Company:

40.9.4   under, arising out of, or in connection with, the Contract;

40.9.5   in connection with the project the subject of the Work under the Contract;

40.9.6   in tort for negligence or otherwise;

40.9.7   otherwise at law, including by statute and in equity generally, including without limitation for restitution for unjust enrichment.

After the expiration of the period for lodging the Final Payment Claim, any claim that the Contractor should have made against the Company and has not made shall be barred and the Contractor shall sign a deed confirming that all claims are extinguished and that the Company is released from and all such possible claims referred to above in clauses 40.9.4 to 40.9.7 inclusive.

40.10          Final Certificate

[This clause is not relevant for present purposes.]

40.11          Interest on Overdue Payments

[This clause is not relevant for present purposes.]

It is apparent from the terms of Clause 40.8 that the Final Reimbursable Costs Claim which must be lodged within 56 days of practical completion is a reference to what Clause 40.2 calls Payment Claims “upon issue of a Certificate of Practical Completion”.  Equally plainly, the Final Payment Claim in Clause 40.9 is what is described as the Final Payment Claim in Clause 40.2.

62              The Final Reimbursable Costs Claim must be lodged within 56 days of practical completion.  It is not a claim for a progress payment.  Instead, it is the last opportunity to claim Reimbursable Costs.  The Contract proceeds on the footing that claims for progress payments will be lodged up until the time of practical completion.  Once the Certificate of Practical Completion has been issued, United has 56 days to lodge its Final Reimbursable Costs Claim.  The Reimbursable Costs, the subject of that claim, will not have been the subject of any prior progress claim.  That is apparent from the terms of Clause 40.3.1.  After the period of 56 days from Practical Completion has elapsed, United cannot lodge a further claim for Reimbursable Costs.

63              Clause 40.9 enables a final claim to be made.  Such a claim may be made after the Final Reimbursable Costs Claim.  Clause 40.9 enables United as the Contractor to include in its final claim “all monies that the Contractor considers to be due from the Company … under, arising out of, or in connection with, the Contract”: see  Clause 40.9.4.  Counsel for United contended that Clause 40.9 permitted United to include in its final claim a claim for Reimbursable Costs which had not been included in earlier claims for progress payments or in the Final Reimbursable Costs Claim.  The clear words of this Contract tell against that submission.  The terms of the second paragraph of Clause 40.8 expressly state that, after the expiration of the period for lodging the Final Reimbursable Costs Claim, any claim United should have made for Reimbursable Costs and has not made shall be barred.  There are only two exceptions to that provision.  The first is a claim for Reimbursable Costs incurred in rectifying defective work during the Defects Liability Period.  That is a claim that can be made in the Final Payment Claim. The second exception is a claim for Reimbursable Costs that have been the subject of a claim for progress payments or the subject of the Final Reimbursable Costs Claim but have not been paid by OneSteel.  Unless the claim for Reimbursable Costs falls within those two exceptions, any claim for Reimbursable Costs not included in an earlier claim for progress payments or in the Final Reimbursable Costs Claim is barred.  The provisions of this contract are clear and unequivocal and compel that conclusion.  It is, of course, possible for United to request an extension in which to lodge a Final Reimbursable Costs Claim.  That represents an extension of the time in which to make a Final Reimbursable Costs Claim.  It is not in truth a Final Payment Claim.

64              It is apparent from these reasons that it is not possible to give a short answer to Question 1.1.  The question must be answered as follows

1.     Claims for Reimbursable Costs which are the subject of a claim for a progress payment must be described and evidenced in a Progress Payment Claim Form completed in accordance with Appendix B1 of the Special Conditions.

2.     Claims for Reimbursable Costs which are the subject of the Final Reimbursable Costs Claim do not have to be described in a Progress Payment Claim Form completed in accordance with Appendix B1 of the Special Conditions.

3.     No claim for Reimbursable Costs may be made after the time for lodging the Final Reimbursable Costs Claim has expired unless

(a)   it is a claim for Reimbursable Costs incurred in rectifying defective work during the Defects Liability Period;

(b)   it is a claim is for Reimbursable Costs which have been the subject of a prior claim for progress payments or the subject of the Final Reimbursable Costs Claim and those costs have not been paid; or

(c)   United has requested OneSteel’s representative to grant an extension to the period for lodging the Final Reimbursable Costs Claim.

QUESTION 2

65              This question asks whether upon the true construction of the Contract, and in particular Clause 40.2 of the General Conditions of Contract, the defendant was and is obliged, either expressly or by implication, to provide to the reasonable satisfaction of the plaintiff evidence and information as to the Reimbursable Costs claimed by the defendant.  It is convenient to repeat the first paragraph of Clause 40.2:

40.2  Payment Claims and Payment

At the times for payment claims stated in Annexure “A”, upon issue of a Certificate of Practical Completion, and within the time prescribed for the Final Payment Claim, the Contractor shall deliver to the Company’s Representative claims for payment supported by evidence of the amount due to the Contractor and such information as the Company’s Representative may require.

It will have been noticed that Clause 40.2 expressly requires United as the Contractor to deliver all its claims for payment “supported by evidence of the amount due to the Contractor and such information as the Company’s Representative may require”.  Clause 40.2, therefore, imposes an express obligation upon United to provide OneSteel with evidence of the amount due and such information as OneSteel’s representative may require.  So much is common ground.  United does not contend other than that it is obliged to comply with Clause 40.2.  The difference between the parties essentially lies in the fact that OneSteel contends that Clause 40.2 obliges United to provide evidence and information to support its claim to the reasonable satisfaction of OneSteel.  United disputes that requirement and points to the absence of such a requirement from Clause 40.2.

66              Clause 40.2 is based on cl  42.1 of the Australian Standard General Conditions of Contract (AS2124-1992) but clearly departs from it in important respects.  AS2124-1992 later became AS4303-1995.  As Byrne J noted in Minson Nacap Pty Ltd v Aquatec-Maxcon Pty Ltd (2001) 17 BCL 269 at [19], Clause 42.1 has been in the same form for many years.  Clause 42.1 of the Australian Standard relevantly provides:

The Contractor shall deliver to the Superintendent claims for payment supported by evidence of the amount due to the Contractor and such information as the Superintendent may reasonably require.

The Superintendent is then obliged within 14 days after receipt of the claim to determine how much, in his opinion, is due to the Contractor.  The requirement in cl 41.2 to provide evidence and information in support of the claim has been considered on a number of occasions.  In Brewarrina Shire Council v Beckhaus Civil Pty Ltd (2003) 56 NSWLR 576 it was held (by Mason P and Ipp JA, Young CJ in Eq dissenting) that the obligation of the Superintendent to issue a certificate for a progress payment claim was subject to the condition precedent that the Contractor support that claim with evidence of the amount due to it and with such information as the Superintendent may reasonably require.  All members of the court also held that the evidence and information did not form part of the claim and the evidence and information to support the claim had to be delivered prior to the lodgement of the claim for payment and not thereafter.  That decision was followed and applied in Aquatec-Maxcon Pty Ltd v Minson Nacap Pty Ltd (2004) 8 VR 16 which reversed the decision in Minson Nacap Pty Ltd v Aquatec‑Maxcon Pty Ltd (supra).  The decision in Brewarrina has been criticised by the editor of Dorter & Sharkey, Building and Construction Contracts in Australia(2nd ed), par 10-270.  I am inclined to agree with the editor of Dorter & Sharkey that the proper and better solution is to improve the drafting of the clause.

67              It is not necessary to determine in this case whether the evidence and information supporting the claim is a condition precedent to payment of a claim for a progress payment or the Final Reimbursable Costs Claim.  There is also a question whether the evidence and information should be supplied with the claim or whether it is possible for OneSteel to require information after the claim has been submitted.  Notwithstanding the decision in Brewarrina, there is force in the argument that OneSteel is entitled, at some stage after the claim has been submitted, to seek information in addition to that supplied with the claim, particularly in the particular circumstances of this contract.  In this respect, the decision in Brewarrina  might be distinguished in the particular circumstances of this case.  However, I do not stay with this issue as Question 2 does not ask when OneSteel may require the information or whether it may require the information after the claim has been made.  It would be improper, therefore, to answer it, especially as the issue was not argued.

68              The only question for determination is whether United is obliged to provide evidence and information to the reasonable satisfaction of OneSteel’s representative.  In my view, the obligation of United is that expressed in Brewarrina, namely, that United is obliged to support its claim for a progress payment or for the Final Reimbursable Costs Claim with evidence and with such information as OneSteel’s representative may reasonably require.  There is an important difference between United being obliged to provide to the reasonable satisfaction of OneSteel evidence and information as to its claim and OneSteel being required to provide such information as OneSteel may reasonably require.  The latter creates an objective standard which is absent in the former.  Question 2 will be answered accordingly.

CONCLUSION

69              For these reasons I answer the questions as follows.

1.1   There is no single answer to this question.  It must be answered as follows

(1)   Claims for Reimbursable Costs which are the subject of a claim for a progress payment must be described and evidenced in a Progress Payment Claim Form completed in accordance with Appendix B1 of the Special Conditions of Contract.

(2)   Claims for Reimbursable Costs which are the subject of a Final Reimbursable Costs Claim do not have to be described in a Progress Payment Claim Form completed in accordance with Appendix B1 of the Special Conditions of Contract.

(3)   No claim for Reimbursable Costs may be made after the time for lodging the Final Reimbursable Costs Claim has expired unless

(a)   it is a claim for Reimbursable Costs incurred in rectifying defective work during the Defects Liability Period;

(b)   it is a claim for Reimbursable Costs which have been the subject of a prior claim for progress payments or the subject of the Final Reimbursable Costs Claim and those costs have not been paid; or

(c)   the defendant has requested the plaintiff’s representative to grant an extension to the period for lodging the Final Reimbursable Costs Claim.

1.2   No.

1.3   The Reimbursable Costs which the defendant is entitled to be paid are limited to direct actual costs that have been reasonably and properly incurred by the defendant in carrying out the Works under the Contract.

1.4   The Reimbursable Costs which the defendant is entitled to be paid are limited to direct actual costs that have not been incurred by the defendant in the circumstances described in (a) to (e) of the Definition of Reimbursable Costs in Clause 2 of the Special Conditions of Contract.

2.     The obligation upon the defendant contained in Clause 40.2 of the General Conditions of Contract to support claims for payment by evidence of the amount due to the defendant and such information as OneSteel’s representative may require obliges the defendant to provide to the plaintiff’s representative such information as he may reasonably require.