Alstom v Yokogawa (No. 7): Good Faith Et Al

There are some seminal decisions in the area of construction law that are remarkably pithy, but the decision of Justice Bleby in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49, in which judgment was delivered on 2 April 2012, is not one of them.  The judgment runs to 461 pages, and covers a remarkably broad range of issues.  Perhaps most remarkable is the court’s treatment of implied obligations of good faith which, in this case, manifested itself as an obligation on the part of Alstom as Head Contractor to provide regularly to YDRML as its Subcontractor, its updated and accurate works programme showing all relevant logic links, notwithstanding that there was no express contractual provision to that effect.

The case arose out of the project for the refurbishment and automation of the Playford B Power Station, which is a coal fired steam turbine power station built at Port Augusta in the 1950’s.  In 2002, the owners entered into a turnkey contract with Alstom for this work: the original price was $148.5M.  Alstom in turn engaged a joint venture including Yokogawa for the electrical, control and instrumentation works for an initial subcontract price of some $33.8M.  YDRML’s work was thus roughly a quarter of the total head contract value, and obviously integral to it.

There were extensive delays, with stage 2 acceptance eventually being certified some 8 months late.  The owner withheld some $13M liquidated damages from Alstom, and claims and cross claims arose between Alstom and YDRML.  Alstom claimed some $25M and YDRML counterclaimed some $9M.

These disputes went to trial, and occupied a 129 sitting days over 18 months.  The submissions of the parties comprised over 3000 pages and the documentary exhibits and transcript ran to almost 9000 pages.

Alstom’s claims failed in their entirety, and judgment was given for YDRML for damages to be assessed.

The purpose of this case note is to identify the key passages from the judgment that are likely to attract the most interest and citation in the future; these passages are set out below in italics with a note as to the significance in regular type face.

60 I am satisfied that by 2002 the expression “turnkey” had acquired an accepted meaning in the engineering and construction industry…61…. the comments of Barwick CJ [in Cable v Hutcherson] nevertheless emphasise the need to construe the actual effect of the terms of a contract, and to assess the actual scope of works. But if expressions such as “turnkey” or “turnkey basis” are used, that will now go a long way towards establishing the intention of the parties.

Prior to this case, it might have been thought that it really makes little or no difference what label the parties put on their contract.  Following this dictum, if the expression “turnkey” is used, that may well predispose the court to the view that the principal has no obligation save to turn up to the building on its completion, turn the key at the front door, and start using the building for its intended purpose.

114 [An entire agreement clause] will not prevent the consideration of pre-contractual evidence in cases such as a claim for misleading conduct, rectification or estoppel.[1] Nor does it operate to exclude necessary implication to give business efficacy to a contract or implication of terms implied by law.[2]

These entire agreement clauses have long been staple fare for contract draftsmen, although litigators are typically much less impressed by their effectiveness.  This case illustrates that entire agreement clauses typically have precious little impact when cases come to court.  See also what is said at paragraph 585 further on; an entire agreement clause will not prevent the application of principles of good faith (such obligations being construed liberally in this case).  Nor did this entire agreement clause prevent a finding of variation of the terms of the contract, see paragrsaph 1519.

118 The recourse that can be had to surrounding circumstances is not a roving inquiry into the detailed history of the pre-contract communications and business dealings between the parties to a contract. This is because the fundamental starting point is the terms within the contract itself, and recourse to the surrounding circumstances of the contract is to serve the purpose of giving meaning to those terms.

          Here the Court showed rather more willingness to look at surrounding circumstances than the more classical analysis, that this can only be done in cases of ambiguity, or where a claim is made for rectification.

124    However, neither this principle nor an “entire contract” clause will prevent the implication of terms where that is necessary to give effect to the contract’s true intent and purpose. The circumstances where additional terms will be implied are less restrictive where a contract is not complete on its face.[3] However where, as in this case, the parties have agreed on many and detailed provisions governing their contractual relations, a more stringent test is required.

          The fact that the Court applied a more stringent test did not prevent it from implying some significant terms in this case.

159    The Article so amended read, for the purposes of the EC&I contract:

3.3          Subcontractor’s Responsibilities

3.3.1  Performance of the EC&I Works

(a)     Subcontractor shall perform the EC&I Works in accordance with the terms and provisions of this Electrical and C & I Contract and will ensure that Performance Guarantees in any area which fall within the Subcontractor works scope that the Refurbished Facility achieves the Performance Guarantees.

165    … Perhaps the true answer is that no-one can say what the real intention of the parties was in agreeing to Article 3.3.1(a).

166    I accept YDRML’s submission that, apart from the opening words of paragraph (a) (“Subcontractor shall perform … this Electrical and C&I Contract”) the paragraph is void for uncertainty.

The Court was critical of the standard of the sub contract drafting in this case, and in particular, the notion that the Head Contractor can readily obtain “back to back” protection by some general wording.  In this case, the key performance obligation was treated as void for uncertainty.  At its least, this statement is a useful reminder that generalised wording seeking to impose Head Contract obligations on Subcontractors is unlikely to be effective.

193    The obligation to use one’s “best endeavours” or “best efforts” is usually implied. Here it was express. They are expressions well understood and have been considered many times by the courts…

Following this, there is a general review by the Court of the cases on what best endeavours means.

6.3       Article 12 is an exclusive remedy

252    Alstom’s argument is to be rejected for a number of reasons. In the first place, the textual alterations proposed by Alstom make no difference to the amount of Liquidated Damages payable by YDRML if delays were in fact caused by YDRML. The liability for and the amount of Liquidated Damages remain unaltered. It therefore makes a mockery of the deliberate and clear limitations intended to be placed on the agreed amount of Liquidated Damages to be paid for delay. Why would parties agree to an elaborate provision for Liquidated Damages for delay at all if damages for the same cause were to be at large?

          This is of a piece with Justice Bleby’s general position in this case that Alstom was not entitled to any relief from its subcontractor other than pursuant to the express terms of the contract.

267    I accept that exclusion clauses of this nature which purport to restrict or eliminate all remedies for breach of contract must be strictly construed. In Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd[4] Lord Diplock observed:[5]

It is of course. open to parties to a contract for sale of goods or for work and labour or for both to exclude by express agreement a remedy for its breach which would otherwise arise by operation of law or such remedy may be excluded by usage binding upon the parties (cf. Sale of Goods Act 1893, section 55). But in construing such a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law and clear express words must be used in order to rebut this presumption.

268    However, the expression “any indirect, economic or consequential loss whatsoever” in Article 3 is an expression of very wide import. It is not a term of art. It has no fixed meaning. It must be read as a whole and considered in the light of the other terms of the EC&I contract and in the light of any relevant background circumstances…

281    To limit the meaning of indirect or consequential losses and like expressions, in whatever context they may appear, to losses arising only under the second limb of Hadley v Baxendale is, in my view, unduly restrictive and fails to do justice to the language used. The word “consequential”, according to the Shorter Oxford English Dictionary means “following, especially as an effect, immediate or eventual or as a logical inference”. That means that, unless qualified by its context, it would normally extend, subject to rules relating to remoteness, to all damages suffered as a consequence of a breach of contract. That is not necessarily the same as loss or damage consequential upon a defect in material where other remedies are also provided…

292    In my opinion the expression in the context of the opening words of Article 3 is sufficient to exclude liability for any loss other than in respect of Liquidated Damages and Performance Guarantee Payments.

These passages, taken together, are a departure from the usual understanding of what “consequential loss” means.  In effect, the Court is saying that pretty much all loss of the type normally seen in construction cases is consequential loss.

294    The expression “Economic Loss” is defined in Article 2.5 of the EC&I contract as follows:

“Economic Loss” means loss of use, production, profit, income, business or power generation, and includes:

(a)     loss of any revenues that could-have been earned from the generation of electricity from hedges, market contracts or market insurance;

(b)     the cost of entering into hedges or market insurance to minimise market exposure; and

(c)     any indirect or consequential loss of that nature.

295    The first question which arises is whether, in the phrase “any indirect, economic or consequential loss whatsoever” the defined expression “Economic Loss” has any application at all. In my opinion it does not…

302    That means that the expression “economic … loss” must be given its ordinary meaning. That is extremely wide. In tort it includes any financial loss not consequential upon loss of or damage to property in which the plaintiff has a proprietary or possessory interest or consequential upon personal injury to the plaintiff.[6] It is difficult to conceive how any of the claims by Alstom could be for other than economic loss sustained by Alstom.

Again, the construction given to the words “economic loss” is wider than what is normally understood by that term, which is much closer to the definition of economic loss in article 2.5 of the contract itself.

306    When speaking of the particular contract in question in that case Cole J said in Turner Corporation Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd:[7]

There is, in my view, no room for a “wider common law right” in the proprietor to treat non-compliance with the contractual obligations by the builder as a separate basis for claiming damages being the cost of having a third party rectify or complete defective or omitted works. That is because the contract specifies and confers upon the proprietor its rights flowing from such breach; that is, the parties have, by contract, agreed upon the consequences to each of the proprietor and the builder, both as to rights and powers flowing from and consequences of, such breach.

…

307    Without more, the combined effect of Articles 12 and 13 and the opening words of Article 3 would seem to make clear in this case that the parties have agreed to limit Alstom’s remedy for breach of the EC&I contract to the specific remedies contained in Article 12.

          There is a view that Austotel is perhaps a somewhat controversial case, and is not always followed.  What it means is that if a contractor is in blatant breach of his obligation to build properly, and the owner does not enforce its rights under the defects liability provisions, then the owner is deprived of any remedy at all.  State Legislation, such as the Building Work Contractors Act in South Australia, precludes the application of the Austotel principle in residential cases, but in any event the more conventional view is that the wording of the ordinary standard form contracts is insufficiently clear to lead to the Turner v Austotel conclusion.

It is hard to avoid the feeling Justice Bleby is applying Turner v Austotel notwithstanding the evident intent of the contract.

316    The claim by Alstom under the Sale of Goods of Act 1895 (SA) is based on a term of fitness for purpose and of merchantable quality implied into the contract by s 14 of the Sale of Goods Act.

317    YDRML, in a brief submission in reply, submits that this was not a contract for the sale of goods but a contract for work done and materials provided. The answer to that submission is far from clear.[8] There is a fine balance in this case between the sale of electrical and control equipment and the provision of skill and labour to provide a control system, together with a question whether the two are divisible. Despite the issue having been joined on the pleadings, resolution of the problem would require much more detailed analysis and submissions than I have had in this case.

318    Fortunately it is not necessary to resolve the problem…

The Sale of Goods Act is more usually regarded as having no application to building contracts, but Justice Bleby seems to be leaving the door open here for such an argument.

331    The imposition of a duty of care is likely to be denied if the parties have clearly considered, discussed and negotiated the terms of their bargain…

333    In other words, where the parties enter into a detailed written commercial agreement intended to regulate with precision what is required of the parties, the relationship between them may be solely governed by that agreement, and the degree of complexity of the contract is important when determining whether a common law duty of care exists.[9]

The law in Australia as to when tortious duties of care apply in commercial contracting arrangements is far from sufficiently settled to be beyond scope for further argument.  It is notable that, in this case, the court found that the contract was sufficiently comprehensive so as to exclude the common law duties of care alleged by Alstom, but not sufficient to prevent the implication of all sorts of cooperation in good faith terms which had the effect of radically impacting the obligations of the parties, as claimed by the subcontractor.

355    The principles which govern whether a court will grant rectification of a contract are well established. They may be summarised as follows:

There is not, at first glance, anything very remarkable about what Justice Bleby was saying as to the circumstances in which rectification of construction contracts is granted, but the passage which follows on is a useful pulling together of the principles.

412    As is the case with any professional discipline, there are numerous key terms to be found in the programming world that require some definition and understanding. A key term, and one that finds its way in to the EC&I contract in various places, is “critical path”. Both the head contract and the EC&I contract required these parties to prepare what is known as a critical path program. Mr Lynas referred[10] to the definition in the Society of Construction Law’s Delay and Disruption Protocol (“the Protocol”).[11]

This is the first of a number of references to the Society of Construction Law Delay and Disruption Protocol.  This protocol was published 10 years ago by the SCL in the UK, but appears to be quietly gaining traction around the common law world setting the standard for what constitutes judicially acceptable methodology for delay analysis.

568    The implication of a term that the parties to a commercial contract agree to do all that is necessary to be done on their part to enable the other party to have the benefit of the contract is well recognised and is not controversial….

571    On that basis, which I accept, the implied duty to co-operate cannot overrule the expressed provisions of the contract.[12]

572 In summary, it would appear that the following principles are established:

          (1)          It is a general rule, applicable to every contract, that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract;[13]

          (2)          Where, in a written contract, both parties have agreed that something shall be done which cannot be effectually done unless both concur in doing it, the proper construction of the contract is that each party agrees to do all things necessary to be done on its part to enable that, even though there are no express words to that effect;[14]

          (3)          Where the performance of obligations under a contract requires co-operative acts, the parties must have mutual duties to comply with the reasonable request for performance made by the other. What is reasonable will depend on the circumstances.[15]

The implication of a duty to cooperate is not novel, but the detailed three part formulation of the rule goes rather further than the usual authorities, and in this case the impact was particularly far reaching.

574    The implied obligation not to prevent or hinder performance by the other party to the contract may be seen as the corollary of the duty to co-operate. It is a duty which is again well recognised.[16]

Again, the implied duty not to prevent or hinder performance is reasonably well established.  It does not appear to have added much to the duty to cooperate here.

585    The basis of the implication of an obligation of good faith was also discussed obiter by Finn J in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd.[17] Finn J considered that the duty of good faith and fair dealing should apply to all contracts, while his Honour acknowledged that others see it only as an implication in particular classes of contract. His Honour also considered that the implication could not be excluded by an “entire agreement” clause. I respectfully agree with both propositions…

593    As to the meaning of good faith in this context, the New South Wales Court of Appeal in Burger King cited with approval, as did Sheller JA in Alcatel Australia Ltd v Scarcella,[18] an extra-curial statement of Sir Anthony Mason that the concept of good faith “embraced no less than three related notions”:

(1)     an obligation on the parties to co-operate in achieving the contractual objects (loyalty to the promise itself);

(2)     compliance with honest standards of conduct; and

(3)     compliance with standards of contract which are reasonable having regard to the interest of the parties.[19]

The notion that a duty of good faith applies to all contracts is deeply controversial.  A more conservative analysis would suggest that the question of good faith should be analysed, not by reference to contracts, but by reference to particular contractual obligations.  Thus, where a party reserves to itself, or to one of its own employees, the role of superintendent, it is pretty well established that there is a duty of good faith in relation to such certification, but much more questionable as to whether that duty of good faith applies to other contractual obligations.

In this decision, the “three related notions”, and particularly the last of them, would have very far reaching implications if universally adopted, in requiring a generalised standard of reasonable conduct in all commercial dealings.  An allegation of failure to act reasonably could be made in pretty much every construction project.

The suggestion that the common law is moving more closely towards a Civil Law approach to good faith is evidenced by Good Faith, Unconscionability Reasonableness – What on earth do they have to do with Construction Law?  being a paper presented to the Fourth International Construction Law Conference in Melbourne in May 2012 by Tómas Kennedy-Grant QC.

606    I do find, however, that the implied obligation to co-operate, the implied obligation not to prevent or hinder YDRML’s performance of the EC&I contract and the implied obligation to act in good faith had the following effects, in this case:

• That Alstom was required to provide regularly to YDRML its updated and accurate Works Program showing at least all logic links to YDRML activities, all relevant interface and access information and the critical paths to the respective Milestone Dates, and particularly the Relevant Scheduled Dates;
• That that should have been provided whenever any material changes occurred which might affect YDRML’s program; and
• That the programs provided should have been in Primavera P3 form and in a format capable of being integrated with YDRML’s own Primavera P3 program.

The most remarkable aspects of this case are the far reaching and detailed obligations that were found to arise out of the implied good faith obligation.  It is rare in a major project for a head contractor to share all of its planning information with its subcontractors, and even when the planning information is shared, it is usually and deliberately in the form of PDF printouts, rather than Primavera or Microsoft Project file form, specifically so that the subcontractor cannot know about the logic lying behind whatever the head contractor is demanding by way of performance.  This dictum may well, therefore, provide a basis for subcontractors in many cases to mount damages claims against head contractors in cases of delay.

891    The fact that Mr Hodge was at all material times an employee of the party by whom he was called does not disqualify him from giving evidence as an expert.

It is pretty well established that a person is not disqualified from being an expert witness merely because he is employed by one of the parties.  In the event, the fact that Mr Hodge was not disqualified as a witness hardly helped Alstom, because he was heavily criticised by the Judge.

895    On the fourth and fifth days of Mr Hodge’s oral evidence[20] counsel for YDRML raised with Mr Hodge his understanding of the requirements of the Practice Direction.  It was clear that Mr Hodge’s understanding of those obligations was then incomplete and that he had not been shown the Practice Direction… 

899    If a legal practitioner is complicit in such a breach in the preparation of material for presentation in evidence or is aware that an expert is or might be in breach of any of those obligations without drawing the witness’s attention to the obligations, the legal practitioner will also be in danger of a serious breach of the solicitor’s own professional obligations to the court.

The obvious moral for lawyers to draw from this passage is to make sure that they have drawn the expert’s attention to the relevant Practice Direction, preferably in writing.

1262    It seems to me that Mr Lynas’s inquiry based on the instruction by which he was confined was an entirely pointless inquiry.

1263  Much of Mr Lynas’s report was in fact written by Mr Timothy Ash and Mr Chris Nicolas.  Mr Lynas wrote the text of the report but Mr Ash conducted the analysis and review of delays in the Appendices.[21] Mr Ash was not called.  Mr King appears to have analysed and completed the whole of his report.

1264  It is also a matter of some concern that Mr Lynas did not adequately discharge or was not permitted to discharge his responsibility to the Court as an expert…

Mr Lynas’s previous reputation as a leading delay analyst in Australia did not immunise him from criticism in this case.

1265  The methodology used by Mr Lynas in analysing delays for Stage 1 Mechanical Completion was a process known as Resource Analysis to which reference will later be made…

1282  The first problem with this method is that it is not an accepted method of delay analysis for construction programming practitioners.  Mr King had never encountered this particular method before.  It is not mentioned in the Protocol as a recognised method of delay analysis.  Mr Lynas also agreed that this method, to the best of his recollection, was not mentioned in the text Delay and Disruption in Construction Contracts by Keith Pickavance,[22] which Mr Lynas himself described as the most comprehensive work on the subject of which he is aware,[23] and an extract from which was relied on by Alstom for other purposes.[24]  Nor was Mr Lynas aware of any documented reference to this particular method in any other text on construction law.[25]  It seems to have been a creature of TBH alone.[26]  I am satisfied that the Resource Analysis method is not a method recognised within the engineering profession.  It should be rejected for that reason alone.

The moral of this judgment is that it is very dangerous for a delay analysis to proceed on anything other than one of the well established routes as set out in the SCL Delay and Disruption Protocol.

1519    Article 2.2.1 is a typical entire agreement clause designed to exclude any previous agreements and representations.  Article 2.2.2 is permissive as to one method of variation.  It is not mandatory and does not provide that the contract may only be amended by written agreement of the parties.  In any event, there is nothing to prevent a written contract from being varied by subsequent oral agreement.  Even a contract under seal may be modified or discharged by oral agreement.[27]  If the contract provided that it could only be amended in writing, such a stipulation would also be ineffective.[28]

1520    Alstom’s plea of lack of authority must also fail.  No evidence has been produced that Mr Haywood and Mr Bruderlin did not have authority to reach such agreement.  Mr Bruderlin was called but did not deny it.  On Mr Donohue’s evidence, Mr Haywood had specific apparent authority from Mr Bruderlin to agree to the variation.  As project manager, Mr Bruderlin might well be expected to have had such authority, especially as to procedural matters, in order to ensure that the project ran as smoothly as possible, rather than being disrupted and delayed by a more cumbersome procedure.

What is particularly significant about this passage, although obiter, is the point that, even if the contract provides that it may be modified only in writing, such a stipulation is ineffective if someone with apparent authority actually agrees to depart from the contractual mechanism.

An alternative route for the subcontractor in this case would have been to have asserted a breakdown of contractual machinery, but this doctrine is, whilst well established, relatively little used in Australia.  In any event, it does not seem to have made much difference, since the court reached the same conclusion by other means.

1530  Alstom ought to have appreciated that its actions in issuing the relevant purchase orders led YDRML to complete the work requested in the reasonable belief that YDRML would be paid for it and that it would not be required to follow the procedure for Change Orders provided in Article 4.2 of the EC&I contract for the work requested by the purchase order.  Alstom’s actions in issuing purchase orders under that procedure would be to YDRML’s detriment should Alstom be allowed to resile from those actions and deny payment on the basis that the Change Order procedure outlined Article 4.2 of the EC&I contract was not complied with.  It follows that I find that Alstom is estopped from denying YDRML payment for the work constituting the B1 variations the subject of a purchase order on the basis that the Change Order procedure was not complied with.

Again, where a party does additional work without following its own change order procedure, the better route is probably breakdown of contractual machinery.  But estoppel worked for the subcontractors in this case, just as well.

1625  This a case where money was never paid by YDRML to Alstom but where it is alleged that Alstom has retained the benefit of the work performed by YDRML and has become unjustly enriched by the value of that benefit.  In that situation common sense suggests that the cause of action arises when the work has been performed.  If so, paragraphs 248N-248P of the Defence and Counterclaim plead a new cause of action which is statute barred.

However, that is also a case where Rule 53.03 applies because it is a cause of action which arises out of the same facts as the original cause of action that was pleaded in paragraphs 243 and 248.