Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd

[2019] NSWCA 270

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:	Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWCA 270
Hearing dates:	17 October 2019
Decision date:	05 November 2019
Before:	Gleeson JA at [1] White JA at [93] Barrett AJA at [94]
Decision:	(1)   Appeal dismissed.  (2)   Appellant to pay the respondent’s costs of the appeal.
Catchwords:	CONTRACTS – performance – discharge by performance – valid termination of cleaning services contract – express term prohibiting use of unauthorised subcontracted labour – where unauthorised subcontractors undertook 90 per cent of cleaning services – whether cleaning obligation could be performed vicariously – consideration of personal contracts – no claim for quantum meruit
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW), r 42.1
Cases Cited:	Australis Media Holdings Pty Ltd v Telstra Corporation Ltd; Australis Media Holdings Pty Ltd v News Corporation Ltd (1998) 43 NSWLR 104 Bruce v Tyley (1916) 21 CLR 277 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24 Davies v Collins [1945] 1 All ER 247 Electricity Generation Corporation t/a Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Kuru v New South Wales (2008) 236 CLR 1; [2008] HCA 26 McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25 Metwally v University of Wollongong [1985] HCA 28; (1985) 60 ALR 68 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 Re Golden Key Ltd [2009] EWCA Civ 636 Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 93 ALJR 582 Tolhurst v Associated Portland Cement Manufacturers [1903] AC 414 Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in liq) (1936) 54 CLR 361; [1936] HCA 6 Young v Queensland Trustees Ltd (1956) 99 CLR 560; [1956] HCA 51 Zhu v Treasurer of New South Wales (2004) 218 CLR 530: [2004] HCA 56
Texts Cited:	J W Carter and M J Tilbury, Remedial Choice and Contract Drafting (1998) 13 JCL 5 J W Carter and G J Tolhurst, Recovery of contract debt following termination for breach (2009) 25 JCL 191
Category:	Principal judgment
Parties:	Advanced National Services Pty Ltd (Appellant) Daintree Contractors Pty Ltd (Respondent)
Representation:	Counsel: J J Young / M Dalla-Pozza (Appellant) J A C Potts SC / J C Conde (Respondent)   Solicitors: Gilchrist Connell (Appellant) HWL Ebsworth Lawyers (Respondent)
File Number(s):	2019/133530
Decision under appeal	Court or tribunal: District Court of New South Wales Jurisdiction: Civil Date of Decision: 27 March 2019 Before: Abadee DCJ File Number(s): 2017/256961

HEADNOTE

[This headnote is not to be read as part of the judgment]

Advanced National Services Pty Ltd (Advanced) brought District Court proceedings against Daintree Contractors Pty Ltd (Daintree) claiming monies owed under a contract to perform commercial cleaning services or, alternatively, damages for breach of contract.

It was accepted by both parties that approximately 90 per cent of the cleaning services were carried out by subcontractors. The primary judge found this to be a breach by Advanced of an express clause of the contract that prohibited it from assigning or subcontracting any portion of the contract without Daintree’s prior written approval. Having noted that Advanced did not make any claim based on quantum meruit, the primary judge held that it was only entitled to payment of approximately 10 per cent of the liquidated sum it sought, representing the component of cleaning services that were performed by Advanced itself.

Advanced appealed against that part of the District Court decision which rejected the balance of its liquidated claim. Daintree filed a notice of contention seeking to uphold the decision on grounds that did not entirely accord with the primary judge’s reasoning. The principal issues raised were:

Whether, as at the date of termination of the contract by Daintree, Advanced had performed the cleaning services such that it had ‘earned’ the whole of the liquidated sum it sought.

If the first question was answered affirmatively, whether an express term of the contract affected an accrued right to receive the contract price after the valid termination of the contract by Daintree.

Gleeson JA (White JA and Barrett AJA agreeing), dismissing the appeal with costs, held:

Advanced was required by the express terms of the contract to undertake the cleaning services personally or through the use of an authorised subcontractor in order to discharge its performance obligations. Other terms of the contract, which placed great significance on the particular manner and conditions of performance and provided important protections for Daintree’s benefit, supported that construction and would otherwise be set at naught if Advanced could discharge its performance obligations by the use of unauthorised subcontractors: [65]-[75], [87].

Australis Media Holdings Pty Ltd v Telstra Corporation Ltd; Australis Media Holdings Pty Ltd v News Corporation Ltd (1998) 43 NSWLR 104; Tolhurst v Associated Portland Cement Manufacturers [1903] AC 414; Bruce v Tyley (1916) 21 CLR 277; Davies v Collins [1945] 1 All ER 247, applied.

As the first question was answered in the negative, it was unnecessary and inappropriate to address the second question which was hypothetical and also raised other issues which had not been raised at trial: [88]-[90].

Kuru v New South Wales (2008) 236 CLR 1; [2008] HCA 26, considered.

Judgment

1. GLEESON JA: The appellant, Advanced National Services Pty Ltd (Advanced), brought proceedings against the respondent, Daintree Contractors Pty Ltd (Daintree), claiming a liquidated sum of $368,876.90 under an agreement for the performance of cleaning services, or alternatively, damages for breach of the contract in that amount. Other claims for relief were made in the proceedings by both parties to which it is unnecessary to refer.

2. It was common ground that approximately 90 per cent of the work performed on behalf of Advanced was undertaken by subcontractors. The primary judge, Abadee DCJ, found that Advanced had used unauthorised subcontracted labour in breach of cl 4.5 of the agreement, which prohibited Advanced assigning or subcontracting any portion of the contract without Daintree’s prior written approval. The primary judge concluded that the liquidated claim should be allowed in part only for those cleaning services which Advanced had performed itself and entered judgment against Daintree for $47,660 including interest: Advanced National Services Pty Ltd v Daintree Contractors Pty Ltd [2019] NSWDC 77.

3. Advanced has appealed against that part of the decision below which rejected the balance of its claim for $368,876.90 plus interest. The appeal raises two questions of construction.

4. The first question is whether the whole of the sum claimed by Advanced of $368,876.90 had been ‘earned’ at the date of termination of the agreement by Daintree. This question turns on what was required of Advanced under the agreement by way of performance of cleaning services. Advanced contended that its performance obligation could be performed vicariously by use of unauthorised subcontracted labour. Daintree contended that personal performance was required of Advanced, given that Daintree had not given its written approval to the use of subcontracted labour.

5. The second question assumes an affirmative answer to the first question. On that assumption, the question is whether any accrued right to receive the contract price would continue unaffected after the valid termination of the agreement by Daintree, or whether the parties had agreed by cl 4.5 of the agreement to exclude any such accrued right after termination of the agreement by Daintree.

6. For the reasons which follow, I have concluded that Advanced had not earned the contract price in respect of cleaning services provided using unauthorised subcontracted labour. The second question does not arise. The appeal should be dismissed with costs.

7. Insofar as this outcome confers a windfall benefit upon Daintree, it should be observed that no claim for a quantum meruit was pleaded or relied upon by Advanced. It is not necessary to address the likely outcome of any such claim had it been pursued by Advanced.

Background facts

8. Advanced carries on the business of providing commercial cleaning services. Daintree is part of a group of companies of which Mastercare Property Services (NSW) Pty Ltd (Mastercare) is the holding company. Daintree provides cleaning services at the premises of Mastercare’s clients pursuant to subcontract arrangements with Mastercare.

Relevant terms of the contractor agreement

9. In October 2016, Daintree and Advanced entered into a written contractor agreement with effect from 26 May 2016 (the agreement), whereby Advanced agreed to perform cleaning services for “Clients” of Daintree in consideration of payment of an agreed monthly fee in respect of each premises at which cleaning services were performed. There were a number of amendments to the agreement adding the premises of other Clients at which cleaning services were to be performed by Advanced. While the “Clients” were in fact clients of Mastercare, it is common ground that nothing turns on this. It is also common ground that the amendments to the agreement are not material to the issues raised in the appeal.

10. The agreement describes Daintree as the Principal and Advanced as the Contractor. The definition of the term “Contractor” provides that “the obligations pursuant to this Contract extend to the directors, officers, employees and agents of” the Contractor: cl 1.1.

11. The agreement provided that Daintree engaged Advanced “to perform the Cleaning Services until the earlier of either the expiry of … or the termination of the agreement” [Emphasis added]: cl 2.1.

12. Clause 2.2 provided:

The Contractor will perform the Cleaning Services for the Principal as set out in Schedule 4 as amended from time to time. Schedule 4 contains the specific details of the Cleaning Services to be provided, such as location, times, days, work to be performed and any specific requirements of the Client. [Emphasis added.]

13. The term “Cleaning Services” is defined in cl 1.1 as the specific services detailed in Sch 4 of the agreement. Sch 4, headed “Details of Cleaning Services to be provided”, listed the cleaning specifications in four “attached documents”. Two of those specifications were in evidence. One related to Woolworths supermarket stores, the other related to Dan Murphy’s stores.

14. Daintree drew attention to cleaning specifications relating to Dan Murphy’s stores which included a requirement that the cleaner must ensure that all employees working on the site had satisfied immigration requirements (par 11), that all staff must wear a uniform that identifies the company which they represent, unless otherwise agreed by Woolworths (par 12), and that any change of personnel must be notified immediately to Woolworths and any new staff must be inducted and trained and introduced to the store manager prior to commencing work (par 16).

15. Clause 3.1 provided:

The Contractor agrees to comply with the further terms and conditions contained in Schedule 2 which deal with the conduct of the Contractor, including any person engaged by the Contractor, while performing the Cleaning Services. [Emphasis added.]

16. Schedule 2 headed “Contractor obligations in the performance of Cleaning Services” relevantly provided:

In providing the Cleaning Services stipulated in Schedule 4, the Contractor hereby agrees to abide by the following terms of conditions and to ensure that any person engaged by the Contractor, or any person or entity to whom the Contractor assigns or subcontracts all or part of this Contract, abides by these terms and conditions.

The Contractor agrees, in providing the Cleaning Services or while the Contractor is on the Principal’s premises, that:

…

9.   all Cleaning Services performed by the Contractor will comply with all applicable statutory regulations, standards and codes. The Contractor will ensure that all persons who may use the cleaning equipment are properly trained in the safe use of that cleaning equipment …

10.   the Contractor will ensure that in performing the Cleaning Services, it complies with all requirements and obligations of the applicable Work Health and Safety legislation, any applicable environmental legislation and will ensure that any required personal protective equipment is provided and properly utilised in performing the Cleaning Services. [Emphasis added.]

17. The agreement provided that Advanced supplied the cleaning services as an independent contractor (cl 3.2) supplying labour, with Daintree supplying all cleaning equipment (cl 5.1) and having a right to request regular reports and review the services performed by Advanced (cl 5.4).

18. Advanced was obliged not to engage in conduct which may harm Daintree or one of its clients, to act in Daintree’s best interests (cl 3.3) and it agreed to indemnify Daintree in respect of all of Advanced’s acts and omissions in performing the cleaning services (cl 7.2).

19. Advanced was also obliged to ensure it met all of its obligations in relation to wages, long-service leave, superannuation, workers compensation and public liability insurance payments (cl 7.3), and to provide evidence of, and keep current, workers compensation insurance, public liability insurance, an Australian Business Number and a current registration for the collection of GST or proof of an exemption (cls 4.1 and 4.2).

20. Clause 4.3 provided:

The Principal may terminate this Contract without notice and with no obligation to compensate the Contractor from the date of termination should the Contractor not maintain, or not maintain to the Principal’s satisfaction, the items listed in paragraph 4.1 above. [Emphasis added.]

21. Clause 4.4 dealt with any changes to the business name or company name of the Contractor. Advanced was obliged to notify Daintree immediately, and within two days at the latest, of any such changes. Clause cl 4.4 continued:

… Should the Contractor fail to advise the Principal of a change in business or company name within the required timeframe, the Principal will not be liable to pay the Contractor in respect of any Cleaning Services performed between the date on which the Contractor’s business or company name changed and the date the Principal was notified of the change to the Contractor’s business or company name. [Emphasis added.]

22. It is common ground that cl 4.4 is to be understood as referring to an obligation to notify any changes to the Contractor’s business name or changes to its company name, as distinct from any changes to the company name or any changes to the business.

23. Clause 4.5 contained a prohibition on assigning or subcontracting of any portion of the contract without the prior written approval of Daintree. It is necessary to set out that provision in full:

The Contractor is not entitled, without the prior written approval of the Principal, to assign or subcontract any portion of this Contract to any other person or entity. Should the Contractor assign or subcontract all or part of this Contract, the Principal will consider this to be a fundamental breach of the Contract and the Principal may terminate the Contract immediately without notice and with no obligation to compensate the Contractor from that date. Further, the Principal may seek damages from the Contractor where the Contractor assigns or subcontracts all or part of this Contract without the Principal’s prior written approval. [Emphasis added.]

24. Clauses 4.6 and 4.7 dealt with the circumstances where Advanced had received written approval from Daintree to assign its rights or subcontract all or part of the contract. Again, it is necessary to set out those terms in full:

4.6   Where written approval is provided by the Principal in accordance with paragraph 4.5, the terms of this Contract will apply equally to the party who is assigned a right or is subcontracted by the Contractor to perform work under this Contract. The Contractor is responsible for ensuring that any person to whom it assigns or subcontracts all or part of this Contract is aware of the obligations under this Contract and complies with those obligations.

4.7   Where the Contractor has received written approval from the Principal to assign its rights or subcontract all or part of this Contract, the Principal will be entitled to conduct an audit of the Contractor to ensure that the Contractor or the assignee or subcontractor has appropriate levels of cover in respect of workers compensation insurance and public liability insurance for the work that the assignee or subcontractor is performing under the Contract. The Principal may provide the Contractor with prior notice of the Principal’s audit, but the Principal is not required to provide the Contractor with notice of an audit.

25. Clause 5.3 provided:

The Contractor agrees that any person engaged by the Contractor will comply with any obligation imposed on the Contractor under this Contract, particularly those obligations in respect of paragraph 9 – Confidential Information, paragraph 10 – Intellectual Property and paragraph 13 – Non-solicitation. [Emphasis added.]

26. Clause 6.1 contained a warranty by Advanced in the following terms:

The Contractor warrants that it has the necessary skills, expertise and qualifications to provide the Cleaning Services. Where the Contractor engages other people to perform Cleaning Services on behalf of the Contractor, the Contractor warrants that any person it engages possesses the necessary skills, experience and qualifications to perform the Cleaning Services. [Emphasis added]

27. The agreement provided that Advanced was to issue invoices for the cleaning services monthly: cl 8.1. Advanced was entitled to payment for those services at the agreed monthly value specified in Sch 3 of the agreement if it had performed all of the services, or a pro rata amount if it had not performed all of the services: cls 8.2 and 8.3. The full terms of cl 8 are reproduced below:

8.   Payment for Cleaning Services

8.1   The Contractor will issue invoices to the Principal on a monthly basis in respect of the Cleaning Services that the Contractor has performed.

8.2   Where the Contractor has performed all of the Cleaning Services for each of the Clients stipulated in this Contract, the Contractor will be entitled to issue an invoice to the Principal for the agreed monthly value of the Cleaning Services as stipulated in Schedule 3.

8.3   Where the Contractor has not performed all of the Cleaning Services or has not performed all of the Cleaning Services in respect of each Client, whether due to the Contractor’s own acts or omissions or due to a matter outside of the Contractor’s control, the Contractor will only be entitled to invoice the Principal on a pro-rata basis for the Cleaning Services actually performed by the Contractor.

8.4   The invoices provided by the Contractor are to include the Client name, the name of the contract as stipulated in Schedule 3, the period and description of the Cleaning Services provided, the Contractor’s Australian Business Number and the completed Subcontractor form as stipulated in Schedule 5.

8.5   The Principal will only pay those invoices that comply with this paragraph 8. Where the invoice is compliant with paragraph 8, the Principal will make payment. [Emphasis added.]

28. Schedule 3, headed “Value of Cleaning Services”, listed the sites at which cleaning services were to be provided, including the value of the contract, both on a per annum and per month basis.

29. Schedule 5, headed “Subcontractor Form”, contained the form of the statement to be completed by Advanced when submitting monthly invoices. The statement included a declaration by an authorised person on behalf of Advanced that, to the best of the declarant’s knowledge and belief:

a)   All wages have been paid for the above period.

b)   Wages paid for the above period is the Award Wage for the appropriate Award.

c)   Every employee has a Police Clearance which is not more than 2 years old.

d)   Worker’s Compensation insurance was current during the above period.

e)   Public Liability insurance was current during the above period.

f)   Payroll Tax (if applicable) will be paid for the above period.

g)   There were no injuries to employees working on the sites for the above period. If there was an injury/ies details must be supplied immediately.

30. Clause 12 dealt with termination of the agreement. Relevantly, either party was entitled to terminate the agreement by providing the other party with 30 days’ written notice: cl 12.2. Daintree was also entitled to immediately terminate the agreement without notice, “and with no obligation to compensate the Contractor from the date of termination” in certain specified events, namely: repudiation by the Contractor of fundamental obligations of the agreement, the bankruptcy or insolvency of the Contractor, a neglect or refusal by the Contractor to perform the Cleaning Services, or the failure by the Contractor to rectify a breach within seven days after receipt of written notice from Daintree providing details of the breach.

Claim for unpaid invoices

31. During the course of the agreement, Advanced issued invoices to Daintree which totalled approximately $634,000, of which approximately $266,000 was paid and approximately $368,000 was unpaid, despite attempts by Advanced to obtain payment. Whilst finding that the cleaning services, the subject of those unpaid invoices, were in fact provided (Judgment [148], [209]), the primary judge noted that it was common ground that cl 4.5 was substantially breached because Advanced used subcontract labour without Daintree’s prior written consent: Judgment [164].

32. On 20 March 2017, Daintree terminated the contract without prior notice. The primary judge found that the termination was valid, although not for the reasons set out in the notice: Judgment [165]-[166]. The primary judge found that Daintree was entitled to terminate the agreement on the basis of a breach of cl 4.5 alone: Judgment [168]. There is no challenge to these findings.

The primary judge’s reasons

33. The primary judge rejected Advanced’s contention that cl 4.5 of the agreement was amended so as to permit the use of subcontractors, or alternatively, that Daintree acquiesced to Advanced’s use of subcontractors: Judgment [150]. There is no challenge to this finding. In this context, his Honour referred to the importance of written, rather than informal, consent to the use of subcontractors, which was required by cl 4.5, and observed that breach of cl 4.5 was taken to be a fundamental breach of the agreement.

34. His Honour also referred to the condition of the engagement in cls 4.1 and 4.2 that Advanced procure workers compensation insurance and that counsel for Advanced accepted that such insurance could only extend to Advanced’s employees – not subcontractors. His Honour observed that this important protection for Daintree’s benefit could be set at nought if Advanced could substitute subcontracted labour for its employees: Judgment [151].

35. Turning to Advanced’s claim in debt, having noted that no claim for a quantum meruit was relied upon, his Honour accepted Daintree’s submission that, “subject to contrary agreement, the right to payment under a contract only matures into a debt only if the performance to which the payment relates was in fact given”. Accordingly, it was necessary to consider the terms of the contract to ascertain whether performance had been provided in accordance with the contract: Judgment [182].

36. After referring to the statement by Dixon J in McDonald v Dennys Lascelles Ltd (1933) 48 CLR 457; [1933] HCA 25 at 476-7 that the exercise of a right of termination by a party to a simple contract will not operate to divest or discharge rights which have already been “unconditionally” acquired, his Honour said that this principle “is subject to the parties’ intention, as revealed by the proper construction of the contract”, referring to the joint judgment of Dixon J and Evatt J in Westralian Farmers Ltd v Commonwealth Agricultural Service Engineers Ltd (in liq) (1936) 54 CLR 361 at 379; [1936] HCA 6: Judgment [184].

37. His Honour found that on the proper construction of cl 4.5 of the agreement, Advanced was entitled to payment of only $40,905.05, representing that component of the unpaid invoices which was not referable to work in breach of cl 4.5 of the agreement. The dispositive reasoning at Judgment [185]-[189] is reproduced in full below:

[185]   In this regard, I agree with DC’s submission that the use of the word "compensate" in cl 4.5 should be given a congruent meaning as it appears in the termination clause in cl 12.3. There, as in cl 4.5, from the point where termination becomes effective, it does not make sense to construe the meaning of compensate as relating to prospective labour services; as none would be permitted to be provided.

[186]   Such rights as ANS acquired to receive payment for services were conditionally acquired on the basis of its use of its employed labour (or subcontracted labour as approved by DC). I do not accept ANS’ submission that its right to receive payment under clause 8 was unconditional.

[187]   On the other hand, I do not consider that, properly construed, the relevant part of clause 4.5 would entitle DC to withhold payment for the entirety of ANS’ invoices, even where such work was undertaken by ANS employees. Clause 4.5, by terms, acknowledged that there were a range of sites where ANS was to perform its work, and a provision such as clause 4.5, served the purpose of deterring ANS from concealing the use of subcontracted labour on some or all of those sites. It does not follow that where ANS supplied its services in the proper fashion, with its employees, that it should be deprived of payment for those services even where it had breached the obligation elsewhere, and on other occasions.

[188]   This construction is consistent, also, with cl 8.3, which set forth certain circumstances in which ANS was entitled to receive payments upon a pro-rata basis.

[189]   The parties agreed if I was to find that ANS was entitled to receive payment for such portion of its invoices attributable to its employees labour, the evidence (based largely upon the calculations of Mr Putland) indicates that the amount validly invoiced is $40,905.05.

Disposition of the appeal

38. As indicated, the appeal raises two questions of contractual construction. The second question only arises if the first is answered favourably to Advanced.

First issue: whether Advanced had earned the contract price

Advanced’s submissions

39. Advanced submitted that the agreement is not a personal contract as that expression is understood in the authorities; rather, it is a contract to produce a result, namely, to provide cleaning services at certain sites of a certain nature. The submission continued that there was no “element of personal skill or an element of personal confidence” required on a true construction of the agreement, referring to the remarks of Barton J in Bruce v Tyley (1916) 21 CLR 277 at 284.

40. In oral argument, Advanced initially submitted that the unauthorised subcontractors it used were agents of Advanced, referring to the extended definition of “Contractor”, and thus, fell within the meaning of the expression ”any person engaged by the Contractor” in cl 3.1. However, later in argument, counsel for Advanced acknowledged that there was no dispute that the unauthorised subcontractors were persons to whom a portion of the contract had been subcontracted in breach of cl 4.5. Counsel accepted that there was no contention by Advanced and no finding below that the unauthorised subcontractors were agents of Advanced. Counsel also accepted that evidence as to agency might have been adduced at trial had such an argument been raised. Given those concessions, which were properly made, no occasion arises to consider this argument: Metwally v University of Wollongong [1985] HCA 28; (1985) 60 ALR 68 at 71.

41. Advanced further submitted that Daintree’s construction of the agreement is uncommercial, effectively amounting to a penalty, arbitrary and approaching capricious in that, among others, it allows for a windfall to Daintree who may receive benefit for services without paying for them, while having adequate protection from cls 3.3, 5.4, 7.1, 7.2, 7.3, 8.4 and 12.3 of the agreement. The submission continued that there is nothing in the agreement or relevant circumstances that require the cleaning services to be provided to be personal to Advanced such that, if performed in breach of cl 4.5, no payment is due.

Daintree’s submissions

42. Daintree submitted that the agreement was not simply a contract to produce a result, and that the parties were not indifferent to who performed the cleaning services. Reference was made to Davies v Collins [1945] 1 All ER 247, Bruce v Tyley at 284 and 288 and Australis Media Holdings Pty Ltd v Telstra Corporation Ltd; Australis Media Holdings Pty Ltd v News Corporation Ltd (1998) 43 NSWLR 104 (Australis Media) at 118-120.

43. Daintree submitted that the contract could not be performed vicariously. Rather, in the absence of its prior written approval for the use of subcontracted labour, personal performance was required of Advanced in order for Advanced to ‘earn’ the agreed fee for the performance of cleaning services.

44. Daintree pointed to various provisions in the agreement as supporting its preferred construction including: the use of the verb “perform” in cls 2.1 and 2.2; that Daintree’s payment obligation in cl 8.2 was dependent on Advanced having “performed” the cleaning services; and Advanced’s obligations under cls 4.1 and 4.2 to procure workers compensation insurance and public liability insurance, and comply with all applicable work health and safety legislation, and under cl 8.4 to complete and submit the monthly Subcontractor form, which included a declaration as to payment of wages, employees’ police clearances, currency of workers compensation insurance and public liability insurance, payment of payroll tax (if applicable), and whether injuries had been sustained by employees.

45. To the extent that the primary judge’s reasoning did not entirely accord with these contentions, Daintree filed a notice of contention seeking to uphold the judgment on this ground.

Reasoning

46. The failure to pay a contract debt has never been regarded as a simple breach of contract. As the joint judgment of Dixon CJ, McTiernan and Taylor JJ in Young v Queensland Trustees Ltd (1956) 99 CLR 560; [1956] HCA 51 observed at 567:

The common law does not and never did conceive of indebtedness in a sum certain for an executed consideration as a mere breach of contract; it is rather the detention of a sum of money and that was so whether the creditor enforced his demand by an action of debt or by indebitatus assumpsit. …

47. The important difference between a claim in debt and a claim for damages for breach of contract is that a claim in debt is a claim to enforce a primary obligation. Hence “[t]he question is whether the sum has been ‘earned’, not whether the contract has been breached”: J W Carter and M J Tilbury, Remedial Choice and Contract Drafting (1998) 13 JCL 5 at 21.

48. The primary judge’s reasoning was based on the classic statement of Dixon J, with whom Rich J and McTiernan J agreed, in McDonald v Dennys Lascelles at 476-7:

When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon him, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected… when a contract, which is not void or voidable at law, or liable to be set aside in equity, is dissolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is liable for damages for its breach. [Emphasis added]

49. The important point made by Dixon J in this passage in McDonald v Dennys Lascelles is that the accrued right to payment is a right accruing from the “partial execution of the contract”. It has been said “[t]hat concept requires an identification of the agreed return for a payment. Unless the parties have agreed otherwise, the payment is recoverable only if its agreed return has been provided”: J W Carter and G J Tolhurst, Recovery of contract debt following termination for breach (2009) 25 JCL 191 at 201.

50. As the primary judge correctly observed, the passage set out above from McDonald v Dennys Lascelles is to be read together with Westralian Farmers v Commonwealth Agricultural Service Engineers, where the joint judgment of Dixon J and Evatt J stated at 379:

It is a rule of law that when a simple contract is discharged by the election of one party to treat himself as no longer bound after the other has committed a breach of the contract, rights and obligations which have already arisen from the partial execution of the contract shall remain unaffected (see McDonald v. Dennys Lascelles Ltd). No doubt it is open to the parties to provide in advance for such an event and by a stipulation to the contrary to produce some other effect. When the parties themselves have provided for the determination of the contract on a given contingency, the consequences flow altogether from their contractual stipulation and are governed by their intention, either actual or imputed. [Emphasis added.]

51. The important point made by Dixon J and Evatt J in the passage in Westralian Farmers v Commonwealth Agricultural Service Engineers is that the parties may agree that rights arising from the partial execution of the contract are divested or discharged upon termination of the contract by the innocent party.

52. The primary judge correctly recognised at Judgment [182] that “subject to contrary agreement, the right to payment under a contract only matures into a debt only if the performance to which the payment relates was in fact given”. However, as Daintree submitted, his Honour does not appear to have directly addressed the question of performance, other than implicitly at Judgment [186], where his Honour referred to “[s]uch rights as [Advanced] acquired to receive payment for services were conditionally acquired on the basis of its use of its employed labour (or subcontracted labour as approved by [Daintree]”.

53. It is not clear whether his Honour intended by this latter statement that the contract price was earned only if Advanced performed cleaning services itself using employed labour, or using subcontracted labour approved in writing by Daintree. The reasons at Judgment [187] could be read that way. Daintree submitted that if that is not what his Honour held, then he should have done so, and this is the argument raised by its notice of contention. Advanced joined issue and submitted that compliance with cl 4.5 is not a precondition to payment.

54. The question whether the contract price had been earned by Advanced where it used unauthorised subcontracted labour directs attention to its performance obligation in the agreement. That is, what is meant by the phrases “[t]he Contractor will perform the Cleaning Services …” in cl 2.2 and “… the Contractor has performed all of the Cleaning Services” in cl 8.2. This is a question of construction which is to be determined “by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose of the agreement”: Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; [2015] HCA 37 at [46] (French CJ, Nettle and Gordon JJ). See also Electricity Generation Corporation t/a Verve Energy v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]; Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 93 ALJR 582 at [44].

55. The essential question in this case is whether the performance obligation was personal and could not be performed vicariously unless Daintree gave its approval in writing to the use of subcontracted labour.

Contracts requiring personal performance

56. It is well established that, in appropriate circumstances, recognition will be given that the relationship between contracting parties must be personal. The authorities were reviewed by this Court in Australis Media at 118-120 (Mason P, Beazley and Stein JJA). Those authorities include the remarks of Lord MacNaghten in Tolhurst v Associated Portland Cement Manufacturers [1903] AC 414 (Tolhurst) at 417:

There are contracts, of course, which are not to be performed vicariously …. There may be an element of personal skill or an element of personal confidence to which, for the purposes of the contract, a stranger cannot make any pretentions.

57. This passage in Tolhurst was referred to with approval in Bruce v Tyley by Barton J at 284 and Isaacs J at 288.

58. Bruce v Tyley involved an agreement between Mr Bruce and Mr Tyley, who were pig farmers, made in anticipation of an expected contract between Mr Bruce and the Commonwealth for the collection and removal of kitchen refuse from a military camp. Mr Bruce obtained that contract with the Commonwealth and later Mr Tyley assigned his rights under his agreement with Mr Bruce to his wife. Mr Tyley and his men collected material from the camp until the Camp Commandant excluded him having discovered that two of Mr Tyley’s employees had stolen food from the camp. In a dispute between Mr Bruce and Mrs Tyley, as assignee of Mr Tyley’s rights under the Bruce/Tyley agreement, the question which arose was whether performance of the government contract could be vicariously performed by Mr Tyley; that is, was the government contract a personal contract and could the Commonwealth insist upon Mr Bruce not introducing any other person to perform it instead of Mr Bruce himself.

59. Barton J held at 285 that there was an element of personal confidence because the Commonwealth might and did entrust the person whose tender it preferred to accept with a choice of servants responsible to him. That did not permit Mr Bruce to assign or delegate the whole of his duties in respect of any particular part of the contract, or to part with his control over its execution.

60. Isaacs J said at 289:

A personal agreement is one which entitles one party to an actual performance of it by the other party personally, and, in the absence of express provision, the right may be inferred from the terms of the contract applied to the subject matter and the circumstances of the parties. [Emphasis added.]

61. Isaacs J found at 289 that the government contract was personal to Mr Bruce and said that it would have been a mere ostensible adherence to his obligations to the Commonwealth, a mere pretence, if Mr Bruce had abdicated his duty and delegated or deputed another to the care and supervision which he was paid to exercise himself. Isaacs J accepted at 291 that removal of garbage per se is not a matter involving personal confidence, but said that the subject matter of the main contract was not garbage per se. His Honour continued at 291:

The real subject matter is the cleansing of the military camp during the time of war, with all that such an establishment connotes, and among other things, all the notorious attempts of the enemy to damage military property and to probe into secrets.

62. Davies v Collins involved a limitation clause in a contract for the drycleaning of garments. The contract contained a limitation clause for damage etc caused in the cleaning and dyeing of garments. The dry cleaner sent a customer’s uniform to be cleaned by a subcontractor but it was never returned. The question which arose was whether the dry cleaner could rely upon the limitation clause. Lord Greene MR referred at 249 to the well-known division between contracts for work and labour in these terms:

One class is where the work and labour can, on the true construction of the contract, only be performed by the contracting party himself or by some staff that he employs. The other class is where, from all the circumstances of the case, including of course the true construction of the contract, it is to be inferred that it is a matter of indifference whether the work should be performed by the contracting party or by some subcontractor whom he employs. In many cases, all that is stipulated for is that the work should be done and the actual hand to do it need not be that of the contracting party himself; the other party will be bound to accept performance carried out by somebody else. The contracting party, of course, is the only party who remains liable.

63. Lord Greene MR continued at 250:

Whether or not in any given contract performance can properly be carried out by the employment of a subcontractor must depend on the proper inference to be drawn from the contract itself, the subject-matter of it, and other material surrounding circumstances. The contract here, as in so many cases, has to be collected partly from the language used and partly from the acts of the parties. The nature of the work to be performed is, of course, always material. The county court judge appears to have thought that the nature of the work by itself was sufficient to exclude the right on the part of the cleaner to have it carried out by a subcontractor, but as I have said I do not think I should agree that that by itself was sufficient. But there are other matters to which we must look ….

But there is another matter which I think is conclusive, and it is this: it is quite obvious that the risk which a customer runs under a limitation clause of this character is entirely different according as the work is to be carried out by the person with whom he contracts or by a subcontractor. Let me expand that. If subcontracting is not permissible, the risk that the customer runs in respect of loss is a very limited one because the opportunity of loss is restricted; if, on the other hand, it is permissible to farm out the contract to a subcontractor, the area within which loss may occur is quite clearly very largely extended; …

Application of principles to the facts

64. It is common ground in this case that the performance of cleaning services did not require any particular skill. However, it does not follow that the parties were indifferent to the persons Advanced engaged to perform the work and on what conditions. The answer to that question requires close attention to the terms of the agreement dealing with the performance obligation and the conditions on which Advanced was to perform the work.

65. As to the performance obligation, there are a number of textual indications that support Daintree’s preferred construction.

66. First, and most importantly, cl 4.5 of the agreement prohibited the assigning or subcontracting of any portion of the contract without Daintree’s prior written approval. Adopting the language of Isaacs J in Bruce v Tyley at 292, that provision in the agreement is a “distinct intimation … that no sub-letting or substitution be permitted” without Daintree’s approval in writing. A breach of this prohibition was a “fundamental breach of the Contract” permitting immediate termination, without notice, or any opportunity to remedy the breach. Plainly, the intention of the parties as reflected in cl 4.5 was that Advanced was to perform the cleaning services itself unless, relevantly, Daintree gave its approval in writing to the use of subcontracted labour.

67. Second, the use of the verb “perform” in cls 2.1, 2.2 and 6.1 to describe the performance obligation rather than a more general expression, such as “provide” or supply” cleaning services, serves to emphasise that the performance obligation is personal to Advanced and not to be discharged vicariously unless other provisions in the agreement revealed a contrary intention.

68. Third, the agreement distinguishes between two modes by which the performance obligation may be discharged; either by Advanced itself or by Advanced using an authorised assignee or subcontractor. That distinction can be seen most clearly in the chapeau to Sch 2 by which Advanced agrees to ensure that “any person engaged by the Contractor” or “any person or entity to whom the Contractor assigns or subcontracts all or part of this Contract” abides by the terms and conditions in Sch 2. The first mode of performance is encompassed by the use of the phrase “any person engaged by the Contractor” in cls 3.1 and 5.3, in addition to Sch 2. In context, this phrase is a reference to the employees or agents of Advanced. The second mode of performance, by the assignment or subcontracting of all or part of the contract, is dealt with in cl 4.5, 4.6, 4.7, 7.1, in addition to Sch 2. In context, these terms are a reference to authorised assignees or subcontractors.

69. As to the conditions on which Advanced was to perform the work, the significance attached to compliance by Advanced with the obligations in cls 4.1 and 4.2 is reinforced by three matters. The first two matters are the mechanisms provided in the agreement for Daintree to verify compliance with those requirements, namely: (a) the right given to Daintree to audit Advanced under cl 4.7; and (b) the provision by Advanced of the monthly Subcontractor form under cl 8.4 declaring, in effect, ongoing compliance with the requirements in cl 4.2. The third matter is cl 4.3 where breach of cls 4.1 or 4.2 permitted immediate termination, without notice, or any opportunity to remedy the breach.

70. The rights given to Daintree by cl 4.3 (immediate termination for breach of conditions of engagement), cl 4.7 (right to audit) and cl 8.4 (provision of monthly Subcontractor form) underscored the importance attached by the agreement to Daintree having an assurance that the conditions specified in cls 4.1 and 4.2 were satisfied with respect to “any person engaged by the Contractor” to perform the work on its behalf.

71. That such an assurance was also given in respect of any authorised assignees and subcontractors, can be seen from cl 4.6 which provided that the terms of the agreement applied equally to any authorised assignee or subcontractor and that Advanced was responsible to ensure that any authorised assignee or subcontractor was aware of and complied with those obligations. The effect of cl 4.6 is that it dictates to the Contractor, in the position of Advanced, the terms on which any assignment or subcontract of part of the contract is to be made.

72. That includes, relevantly, compliance by the assignee or subcontractor with the Contractor’s obligations in cls 4.1 and 4.2 to procure workers compensation insurance and public liability insurance for the assignees or subcontractor’s employees or agents, the Contractor obligations in the performance of cleaning services in Sch 2, in particular cls 9 and 10, and the Contractor’s obligation to provide the monthly Subcontractor form. It is not in dispute that the cleaning services provided by an authorised assignee or subcontractor answer the description of cleaning services “performed” by Advanced for the purposes of cl 8.2 and that Advanced, not the authorised assignee or subcontractor, is entitled to receive the contract price.

73. Given that Advanced accepted below that the workers compensation insurance could only extend to Advanced’s employees and not subcontractors, the primary judge was correct to observe that this important protection for Daintree’s benefit could be set at naught if Advanced used subcontracted labour, without Daintree’s approval in writing. This is another indicator that the contract price was not earned by using unauthorised subcontracted labour.

74. The evident purpose of the provisions dealing with the conditions on which Advanced was to perform the work is, as Daintree submitted, that Daintree have an assurance that the persons who were in the “Client’s” premises mopping the floors etc, were covered by workers compensation insurance and public liability insurance, had satisfactory police clearances (and at least for Dan Murphy stores, also had immigration clearances), had appropriate occupational health and safety training, and were paid wages in accordance with their award entitlements. As explained above, that is so whether such persons were engaged by Advanced to perform the work, or were engaged by an authorised assignee or subcontractor to perform the work.

75. In submitting that the cleaning services could also be performed by Advanced through use of unauthorised assignees or subcontractors, Advanced sought to characterise the agreement as simply a contract to produce a result. I do not agree. The subject matter of the agreement is not cleaning services per se. The subject matter is the performance of cleaning services by Advanced in a particular manner, and on certain conditions, namely, by Advanced itself using its employees or agents, or through authorised assignees or subcontractors. It was not a matter of indifference to the parties whether the work should be performed by Advanced itself or by an unauthorised subcontractor.

76. It remains necessary to deal with a number of separate submissions by Advanced. One is the argument that the agreement gave adequate protection to Daintree, such that compliance with cl 4.5 is not required to earn the contract price. This submission should be rejected.

77. First, it poses the wrong question. The question is whether Advanced had earned the contract price, not whether Daintree had adequate protection for breach of cl 4.5.

78. Second, none of the provisions referred to by Advanced (see [41] above) are directed to whether Advanced had earned the contract price by use of unauthorised subcontracted labour.

79. Third, there are provisions in the agreement which fortify the personal nature of the contract. For example, the warranty in cl 6.1 is given in terms that the Contractor itself warrants that it has the necessary skills, expertise and qualifications to provide the cleaning services. Insofar as the warranty addresses the circumstance where the Contractor engages other people to perform the cleaning services “on behalf of the Contractor”, that is to be understood as a reference to employees or agents of Advanced, given that the warranty only relates to “any person that it engages”. The concept of “engagement” of persons to perform work on behalf of the Contractor is to be distinguished from the concept of the Contractor assigning or subcontracting all or part of the contract.

80. However, even if it be assumed that the words “on behalf of the Contractor” in cl 6.1 extend to assignees or subcontractors, given the prohibition in cl 4.5 of the agreement, those words in the warranty could only be taken as referring to an authorised assignee or subcontractor of all or part of the contract under cl 4.5.

81. Fourth, it is not difficult to envisage commercial reasons why reasonable persons in the position of the parties would have intended that, in addition Daintree’s rights of termination and to claim damages for breach of cl 4.5, that the contract price would not be earned by Advanced if it used unauthorised subcontract labour. One is the potential exposure of Daintree or Mastercare to claims arising from underpayment of award wages to persons engaged by unauthorised subcontractors, and the reputational damage to Daintree and Mastercare if reported as underpaying any persons engaged by its subcontractors.

82. Next, it is the contention of Advanced that Daintree’s preferred construction of the performance obligation gives rise to an uncommercial result and Daintree obtains a windfall. It is well established that the Court is to have regard to the parties’ aim, objectively ascertained even if there is little extrinsic evidence about the surrounding circumstance apart from the document itself. As Arden LJ said in Re Golden Key Ltd [2009] EWCA Civ 636 at [28]:

…, unless the contrary appears, the court must assume that the parties to a commercial document intended to produce a commercial result, and the court must thus take into account the commerciality of the rival constructions, if that commerciality can be identified. The commerciality of a particular construction may be a crystallising factor in its favour where it is implausible that parties would have intended any other result.

83. Similarly, in the joint judgment in Zhu v Treasurer of New South Wales (2004) 218 CLR 530: [2004] HCA 56 at [82], Gleeson CJ, Gummow, Kirby, Callinan and Heydon JJ said that it was necessary to construe the document in issue in that case, a Deed Poll, so as to avoid it making commercial nonsense or working commercial inconvenience. The joint judgment emphasised that the commercial purpose of the document, being the commercial purpose of reasonable persons in the position of the parties, was relevant and that required attention to “the genesis of the transaction, the background, the context, the market” in which the parties were operating, as known to both parties, citing Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337; [1982] HCA 24 at 350 per Mason J quoting Lord Wilberforce in Reardon Smith Line v Hansen-Tangen [1976] 1 WLR 989 at 995-996.

84. In this case, neither party made reference to the surrounding circumstances. The commercial purpose of the agreement, as ascertained from the document itself, is that Advanced itself perform the cleaning services unless Daintree gave its approval in writing to the assignment or subcontracting of all or part of the contract. The notion that Advanced could perform the contract vicariously was expressly rejected in the terms of the agreement, save for relevantly approved subcontracting.

85. One further matter should be mentioned concerning the windfall complaint. It is arguable that there may be other answers to the assertion of an uncommercial result but these were not addressed by the issues raised at trial. One answer might be that Advanced has a claim in restitution based on a quantum meruit. However, as indicated, no such claim was made by Advanced at trial. Another possible answer might be that on Daintree’s preferred construction, cl 4.5 or cl 8 or both of them in combination amount to an unenforceable penalty. That was referred to in passing in this Court but again that issue was not raised by Advanced at trial.

86. It is not necessary to say anything further about these matters. Advanced has not demonstrated that the commercial purpose of the agreement included that it could perform the contract vicariously using unauthorised subcontracted labour.

Conclusion

87. On the proper construction of the agreement, the performance obligation of Advanced could not be discharged by using subcontracted labour without Daintree’s approval in writing. It follows that Advanced had not earned the contract price for the cleaning services provided by the use of unauthorised subcontracted labour. There was no error by the primary judge in dismissing this part of Advanced’s liquidated claim.

Second issue: whether cl 4.5 excludes any accrued right of Advanced after termination of the agreement by Daintree

88. I have considered in accordance with Kuru v New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12] whether the second question should be resolved, although it cannot affect the outcome of the appeal. Given Advanced’s failure on the question raised in Daintree’s notice of contention, I am satisfied that good reason exists not to deal with the second question.

89. First, bound up in the second question is the potential issue already mentioned concerning whether cl 4.5 or cl 8 or both of them in combination amount to an unenforceable penalty. It is not necessary, nor appropriate, to address this issue since it was not raised at trial by Advanced.

90. Second, the resources of the Court should not be taken up in dealing with an additional argument which cannot overcome the fundamental flaw in Advanced’s claim for the contract price for cleaning services by providing unauthorised subcontracted labour. The question of whether cl 4.5 is a stipulation that divests or discharges accrued rights upon termination by the innocent party is, in the circumstances, entirely hypothetical.

Conclusion and Orders

91. The appeal has failed. There is no reason why costs should not follow the event: Uniform Civil Procedure Rules 2005 (NSW), r 42.1.

92. I propose the following orders:

1. Appeal dismissed.

2. Appellant to pay the respondent’s costs of the appeal.

93. WHITE JA:   I agree with Gleeson JA.

94. BARRETT AJA: I agree with Gleeson JA. Any superficial impression that it was of no moment who mopped floors or performed other cleaning tasks is dispelled when regard is had to the provisions of the contract discussed at [65]-[75] of his Honour’s reasons.

**********

Decision last updated: 05 November 2019