Ancon Trading Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd
[2008] VSC 225
•27 June 2008
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2066 of 2005
| ANCON TRADING PTY LTD | Plaintiff |
| v | |
| McCONNELL DOWELL CONSTRUCTORS (AUST) PTY LTD | Defendant |
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JUDGE: | Mandie J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 26-29 February, 3 March 2008 | |
DATE OF JUDGMENT: | 27 June 2008 | |
CASE MAY BE CITED AS: | Ancon Trading Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2008] VSC 225 | |
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CONTRACTS – sub-contracts relating to pipeline project – horizontal directional drilling of pipeline under river – defects in protective coating of pipe – whether sub-contractor liable for damages for breach of sub-contract where head contractor had failed to carry out required test immediately after installation of pipeline under river
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P Lacava, SC with Mr S Pitt | Whitehead Summons |
| For the Defendant | Mr N Pane | Clayton Utz |
HIS HONOUR:
Introduction
In or about January 2004[1] the plaintiff (“Ancon”) entered into two sub-contract agreements with the defendant (“McConnell”) in relation to the Telfer Gas Pipeline Project in Western Australia. The Project involved the design and construction of a pipeline of about 442 km to transport natural gas from an existing pipeline to the Telfer mine site owned by Newcrest Mining Limited. McConnell was the Head Contractor for the Project – the Principal was an entity which may be conveniently referred to as “GasNet”.
[1]The sub-contract works apparently commenced before the formal sub-contracts were executed but nothing turns on this.
Under the first sub-contract (“the HDD sub-contract”) Ancon agreed with McConnell to carry out certain horizontal directional drilling works under two rivers, namely, the Strelley River and the De Grey River. These works were respectively referred to as the Strelley River crossing and the De Grey River crossing. Under the second sub-contract (“the Road and Rail sub-contract”) Ancon agreed with McConnell to carry out certain road and rail boring works.
By its statement of claim, Ancon claims the sum of $1,023,283.80 made up as follows:[2]
(a) the sum of $496,724.80 as the unpaid balance of the price payable under the HDD sub-contract;[3]
(b) the sum of $134,409 being a claim for extra payment pursuant to the HDD sub-contract as a result of encountering rock on the Strelley River crossing;[4]
(c) the sum of $364,650 being a “standby claim” under the Road and Rail sub-contract;[5]
(d) the sum of $27,500 as the unpaid balance of the price payable under the Road and Rail sub-contract.[6]
[2]See para 8 of the statement of claim.
[3]Invoices nos. 040 and 043.
[4]Invoices nos. 047 and 053.
[5]Invoices nos. 046, 054 and 055.
[6]Invoice no. 058.
McConnell denies that Ancon is contractually entitled to any of the above amounts and further counterclaims for breach of the HDD sub-contract seeking damages in the sum of $832,285.65. The alleged breach relates to Ancon’s failure to construct a pipeline for the Strelley River crossing that complied with the relevant contractual requirements and the damages claimed relate to the cost of investigation and rectification, including the construction of a replacement pipeline under the Strelley River.
The parties agreed that the principal issue in the proceeding related to the counterclaim, namely, whether Ancon was liable in damages to McConnell for the alleged breach of the HDD sub-contract and most of the evidence related to that issue. I will therefore deal with that issue first before dealing with the claims of Ancon under its statement of claim.
Horizontal directional drilling
Ancon was required to lay a pipeline under the Strelley River by means of horizontal directional drilling. This process may be briefly described as follows. A large rig and drilling equipment was used to pass a “pilot drill” beneath the earth from one bank of the river downwards under the river and coming up on the other side. Once a small hole had been drilled it was then sufficiently “reamed out” so as to make a hole or tunnel sufficient to accommodate the pipeline. The drilling process was assisted by the use of a “slurry” (a mixture of water, bentonite and mud) that was used to lubricate the process. Once the hole was large enough, the “drill string” having been pushed through the hole, “the pipe string”, consisting of lengths of steel pipe joined together and lined up on the far side of the river from the drilling rig, was attached to the drill string and then “pulled through” the hole or “pulled back” through the hole. In the case of the Strelley River crossing, the length of the pipe string was some 450 metres.
In order to satisfy the required standard of design and finish, it was necessary for the pipeline to be protected against rust. This was to be achieved, so far as the evidence indicates, by two methods. First, the pipe had to have a protective coating of naprock resin that was “flawless”, that is, the coating had to be undamaged and not even have any pinholes (called “holidays”) in it. Secondly, the pipe was ultimately to be protected by an electrical charge or charges provided by what is called a cathodic protection system.
Relevant provisions of the Head Contract
Under the Head Contract between GasNet and McConnell, McConnell took full responsibility for all activities required to build and put into operation the pipeline system,[7] including the engineering and design of the work, the design, installation and commissioning of a cathodic protection system, the provision of quality control inspection of all construction activities to the satisfaction of GasNet, furnishing a quality control and quality assurance program which ensured a high quality pipeline system installed to GasNet’s satisfaction, performance of construction and as-built survey and preparation of construction and as-built drawings and documentation in accordance with GasNet’s standards and procedures and completion of a DCVG Survey of the pipeline and associated facilities.
[7]See cl.2.1 of the Design Specification.
A DCVG survey is a “Direct Current Voltage Gradient” survey the purpose of which is to test the integrity of the protective coating on the pipeline and to the nature of which I will later refer. The Head Contract required that,[8] after the first period of significant rain, a DCVG survey would be conducted by McConnell along the entire pipeline and at all facilities and that “all defect locations and size shall be logged and the GPS co-ordinates of each defect recorded” and that “all defects greater that 1.0% IR[9] shall be repaired at [McConnell’s] cost.”
[8]See cl.2.4.5 of the Design Specification.
[9]This is a reference to “insulation resistance”.
In the case of directionally drilled crossings (this case), the Head Contract required that the pipe and joint coating should be to GasNet’s approval.[10]
[10]See cl.3.2.7 of the Design Specification.
Clause 24.1 of the Head Contract provided that McConnell must, at its own expense, carry out all such tests and/or inspections of any part of the works as was specified in the contract or “as required by Best Industry Practices” and cl.1 of the Head Contract relevantly defined “Best Industry Practices” to mean:
“the practice of … testing … to the Standard or Standards of excellence that might reasonably be expected of highly skilled and experienced design and construction contractors of facilities such as those comprised in the Works or that are in fact achieved by the Contractor whichever is superior … and which is applicable in Australia.”
Relevant provisions of the HDD sub-contract
The HDD sub-contract provided that[11] certain documents should be deemed to form part of the sub-contract including the “Subcontract Agreement”, the “Conditions of Subcontract” and the “Scope of Subcontract Works”.
[11]Clause 2.
The HDD sub-contract provided[12] that Ancon had and should be deemed to have carefully examined the Head Contract and to have full knowledge of all of the provisions of the Head Contract. It further provided[13] that Ancon should observe, perform and comply with all the provisions of the Head Contract on the part of McConnell to be observed, performed and complied with as if all the same was severally set out therein and should execute the works so as to enable McConnell to discharge its obligations under the Head Contract and in a manner that did not cause McConnell to be in breach of the Head Contract.
[12]Clause 3.1.
[13]Clause 3.2.
Clause 10.5 of the HDD sub-contract, dealing with site conditions, contained a provision that Ancon had investigated the site to the full extent necessary for its purposes and was familiar with and had satisfied itself with respect to a number of matters including “subsurface geology and conditions and the nature and quantity of surface and subsurface materials to be encountered”. This clause further provided that (subject to cl.16[14]) Ancon specifically acknowledged and accepted the Site Condition and agreed that the Subcontract Price would not be adjusted as a result of any Site Conditions.
[14]Clause 16 dealt with delays and extensions of time.
By cl.13 of the HDD sub-contract, Ancon warranted, inter alia, that the sub-contract works would be carried out and completed based on Best Industry Practices[15] and would be fit for the purposes for which they were intended and would be “free of defects and deficiencies” and would be designed, engineered and constructed in compliance with the Scope of Subcontract Works.
[15]This phrase was defined in the HDD sub-contract in the same terms as it was defined in the Head Contract.
Clause 17 of the HDD sub-contract provided that Ancon must, at its own expense, carry out all such tests as were specified in the Subcontract or as required by Best Industry Practices and that McConnell might require Ancon to carry out any test not described in the Subcontract and that if any part of the works failed to pass any test, Ancon must either rectify it to McConnell’s satisfaction or replace the same.
Clause 18 of the HDD sub-contract dealt with Practical Completion and I will refer to that provision later.
Annexed to the HDD sub-contract and forming part of it was the “Scope of Subcontract Works” contained in the original request for quotation from McConnell to Ancon. The Scope of Subcontract Works relevantly contained the following descriptions and provisions:
“The work to be undertaken consists of the design and construction of 2 Horizontal Directional Drilled (HDD) crossings….
The scope includes 1 .. pipeline crossing of the De Grey River and 1 .. crossing of the Strelley River…
The .. crossings will be designed and constructed using API 5L Grade X60 line pipe with a standard wall thickness of 9.3 mm and coated with Naprock ..
The pipe string will be fabricated, coated, pre-tested and the pull-head attached by [McConnell] ..
[Ancon] shall be responsible for the detailed design and planning of each crossing installation.
A detailed HDD procedure for the construction shall be prepared, together with designs for each of the crossings showing at least the proposed drill entry point, exit point and profile.
…
[McConnell] will undertake hydrostatic pre-testing of the pipe-string prior to pull back.
Immediately after installation of the directional drill, and before tying it in, the integrity of the coating shall be tested by [McConnell].”
(emphasis added)
The Scope of Works went on to detail the work required by Ancon under the HDD sub-contract including “drilling, reaming, clearing of the bore hole”, “installation of the pipe string into the bore”, “preparation for and assistance with the coating integrity testing” and:
“where required, removal of the pipe string from the bore, repair of any coating damage, and re-installation of the drill string”.
(emphasis added)
The Scope of Works also detailed the work required by McConnell as including “coating integrity testing of fabricated pipe string prior to and after installation of HDD crossing”.
Facts
Ancon’s work on the Strelley River crossing commenced in or about late November or early December 2003. The drilling process involved the use of 9.5m drill rig sections that followed in behind the drill head. The pipe string or the “product pipe” was constructed by McConnell on the other side of the river from the drill rig. Sections of the pipe were placed end to end, welded together, and then sandblasted and then the protective coating was applied and tested by McConnell.
Meanwhile the drill hole was reamed out and then the pipe string was attached to the drill string with a swivel between the two strings so as to allow the drill string and the barrel reamer to spin whilst the pipe string was prevented from rotating in order to avoid damage to the protective coating.
The pipe string was attached to the drill head in the afternoon of 19 December 2003 and the “pull through” then commenced and was completed later that evening. Mr Ben Anthony (“Anthony”) was Ancon’s employee in charge of the pull through.
Evidence was given by Mr David Hale (“Hale”) that he was employed by GasNet as an inspector during the pull through. In his witness statement, Hale testified that, during the pull through, he was in the “rig cabin” with Anthony and was inspecting the gauges and making notes that were subsequently used to prepare his report to GasNet.
Hale filled out a three page daily inspection report covering the “pull through” or “pull back” of the pipe. His notes indicate that the pull back started at 3.33 pm. His notes further indicate that, at some stage, the “driller slowed down the pull back whilst reamer passed through granite section” and, a little later, that “reamer grabbing hole”. Thereafter his notes indicate some stopping and restarting of the pull back during which he noted “tight hole” and, a little later, “tight”.
In his witness statement, Hale testified that:
“The pull through proceeded well but the pulling got a bit tight for a while on the last section. The rig was able to continue pulling the pipe satisfactorily. It loosened up again shortly afterwards and the pull through was completed successfully.”
A slightly different picture emerged during cross-examination of Hale. Hale said that when the granite section was encountered the pull through pressure increased significantly and the pull through was stopped (when they came to the “real bad area”) and the drill string had to be pushed back one or two feet (and that this pushing back occurred on two or three occasions). Later in his evidence he referred to “trouble” towards the end of the pull but also said “all the way through they was having trouble with it”.
In the end, Hale seemed to contradict his evidence in chief:
Q. You were satisfied that it was a good pull through?
A. I said it was a bad pull through.
Q. In your witness statement at paragraph 5 you say “the pull through proceeded well, but the pulling got a bit tight for a while on the last section”?
A. Yes, I said it was pulling well. I am telling the truth, it was pulling well. It got tight on the last segment.
Q. Then you say “the rig was able to continue pulling the pipe satisfactorily”?
A. After it had gone through the tightness.
Q. OK. “It loosened up again shortly afterwards and the pull through was completed successfully”?
A. It was completed successfully, but I didn’t know if there was any damage inside, did I?
Q. When you say it was completed successfully, is that a reference to the fact that they got the pipe through?
A. Yes.
I formed the impression that Hale held the opinion that the pull through had not gone as well as his report tended to indicate and that the difficulties to which Hale referred in his evidence had been such that this was probably when the damage to the protective coating on the pipe (that was subsequently detected) had been caused. However the precise cause or causes of the damage to the coating on the pipe is not relevant to any issue in this proceeding because, in its defence to amended counterclaim, Ancon admitted “that the coating integrity on the pipe string was damaged during the pull back” and it would appear that the central issue on the counterclaim is whether Ancon is liable in damages for any and what breach of contract in relation to the consequent cost of replacing the pipeline under the Strelley River.
Anthony testified that on or about 21 December 2003, shortly following the pull through of the Strelley River pipe string, he asked Benjamin Philip Lyons (“Lyons”), McConnell’s construction manager, when McConnell was going to test the pipe and that Lyons told him that the reason it was not being tested was because McConnell wanted to test the Strelley River and De Gray River pipe strings at the same time. Lyons testified that he did “not recall” being asked when the pipe was going to be tested but I am satisfied that Anthony’s evidence is correct and I note that it accords with what in fact subsequently happened.
Anthony testified that the reason he asked Lyons about testing the pipe was because it was industry practice that the pipe must be tested immediately after it had been pulled through. He said that it was well known in the industry that it was crucial to test the pipe immediately after it had been pulled through because if any damage to the coating was detected, the pipe string was still floating in the water and bentonite solution and it could be pulled back out through the hole and the pipe could be repaired. He added that, after about 48 hours following the pull through, the water and bentonite solution dispersed and seeped into the ground and the drying up of the soil surrounding the pipe made it impossible to pull the pipe back out. He said that in his experience the maximum possible time allowable after pull through and before testing was one week.
The pipe string was tied into the main pipeline some time not too long after the pull through at the Strelley River crossing. Anthony testified that the decision to tie the pipe string into place in the pipeline was made by Barrows of McConnell.
On 21 December 2003, Ancon demobilised its staff and equipment. After the Christmas-New Year holidays, they returned to perform the De Grey River crossing. This took place on 17 January 2004 and no issue arises concerning the De Grey River crossing.
By letter dated 18 January 2004 from GasNet to McConnell, GasNet noted its understanding that McConnell was not planning to do any tests on the integrity of the HDD coating prior to welding the relevant section into the main pipeline. GasNet stated that Best Industry Practice was to test the integrity of the HDD coating immediately on completion of the pull back and filling of the HDD annulus with mud and prior to demobilising the HDD rig. Accordingly, GasNet said, McConnell had to perform the works in accordance with Best Industry Practice and the requirements of the contract and test the integrity of the HDD pipe coating prior to welding it into the main line. GasNet’s letter went on to say that a Direct Current Voltage Gradient (DCVG)[16] survey was severely limited as the depth of the pipeline cover increased and would not provide suitable information on the integrity of the coating for the 2 HDDs installed on the project. GasNet suggested an appropriate coating integrity test to be used and said that “a clear pass” was required using that method, otherwise an experienced person in corrosion protection would be required to interpret and/or conduct further tests. GasNet asked McConnell to confirm that an HDD coating integrity test would be conducted on the HDD drill strings prior to welding into the main line.
[16]It is unnecessary to describe what is involved in performing a DCVG test although evidence about this was given by Ancon’s expert - at transcript pp.92-3, 99-101 Mr Martin described a DCVG test and distinguished it from the form of current density test (or current drainage test or polarisation change test) carried out as a coating integrity test before a pipe was tied in to the main pipeline.
An attachment to GasNet’s letter set out the proposed coating integrity test which involved running an electrical current through the isolated section of pipe to be tested. The description of the proposed test method concluded by stating:
“the criteria for a pass is that the current should be less than 1 microamp per square metre. Usually the HDD’s either clearly pass or clearly fail this test. In the event of a “just fail”, say to 1 to 5 [microamp per square metre], then a more complex alternative test shall be used or a [corrosion protection] expert engaged to evaluate the level of protection that would be achieved at the location in question.”
GasNet followed up with a further letter to McConnell dated 21 January 2004 in which it was noted that McConnell had “tied in the Strelley River HDD without conducting a coating integrity test”. GasNet then referred to cl.24.1 of the Head Contract[17] which obliged McConnell to carry out all such tests as were required by Best Industry Practice and GasNet then stated that McConnell’s failure to conduct any form of coating integrity test in accordance to Best Industry Practice was a “deficiency in the Works” that had to be “rectified immediately”.
[17]See para [11] above.
McConnell replied to GasNet’s letters, by a fax dated 21 January 2004, stating that coating integrity checks were conducted “during the HDD pullback operations .. in accordance with standard industry practice of holiday detection” and that further coating integrity tests would be carried out in due course in accordance with the Head Contract. I am satisfied on the evidence that this was an evasive response because the practice of “holiday” detection related to testing of the coating before the pipe was pulled through the hole whereas GasNet’s letters were clearly concerned with a coating integrity test after the pipe had been pulled through.
GasNet replied to McConnell’s fax by letter dated 26 January 2004. GasNet stated that, based on the scouring of the HDD pipe coating that was cut off from the lead of the HDD string, the Strelley River crossing was defective and required immediate attention and action. GasNet required McConnell to cut the HDD string from the main pipeline in order to electrically isolate it and then to carry out the necessary coating integrity test.
By fax dated 31 January 2004, McConnell advised GasNet that tests done by G.P.R. Electrical (WA) Pty Ltd on 22 January 2004 (results of which were enclosed) showed that the Strelley River crossing was not defective. GasNet replied to McConnell by fax on the same day stating that the test for the Strelley River had been conducted when the HDD drill string was tied into the main pipeline (with temporary cathodic protection applied) and was therefore not valid. After referring to test results for the De Gray River, GasNet said that the contract required that the pipeline be installed to ensure the coating remained intact but that, from the evidence to date, the coating integrity did not comply with these requirements. I note that continuing discussion took place within McConnell’s organisation concerning GasNet’s requirements and how to deal with the problem raised by the Strelley River crossing in the course of which Steve Chai of McConnell, in an internal email dated 17 February 2004, said to others in the organisation that “[f]or the Strelley River , we will first have to convince [GasNet] that their idea of best industry practice (testing the HDD string before connection to the mainline) is not absolutely necessary”.
By letter dated 20 March 2004 from GasNet to McConnell, GasNet confirmed that a coating integrity test would be conducted by McConnell on the HDD crossings in the manner proposed by GasNet’s letter of 18 January 2004 and that, for this purpose, the HDD sections would be cut so as to isolate the drill string from the rest of the pipeline.
As a result, a coating integrity test in accordance with GasNet’s requirements was carried out on the Strelley River crossing in late March 2004. Cathodic Protection Systems in a letter to GasNet dated 29 March 2004 reported that the Strelley River crossing had failed this test and this information was conveyed by GasNet to McConnell by letter dated 30 March 2004 in which GasNet suggested that a meeting be arranged with McConnell’s corrosion designers and GasNet’s corrosion consultants to agree on a resolution to that issue. A meeting was subsequently held and then McConnell procured a report from South Corrosion Control Services Pty Ltd, in a letter dated 16 April 2004, questioning the reliability of the coating integrity test and the criteria adopted in interpretation thereof.
As a result, McConnell arranged a DCVG test. However, the Southern Corrosion Control Services report dated 12 May 2004 showed, following this DCVG test (that by then had been carried out), a defect of 27% IR on the Strelley River crossing. The report described this defect as a “single coating defect, short in extent but severe in magnitude….found 80 metres downstream of the Strelley River HDD start point”.
On 19 May 2004 GasNet wrote to McConnell concerning the report from Southern Corrosion Control Services and asked McConnell to advise of its proposal to rectify the defect constituted by the coating fault identified in that report.
On 21 May 2004 McConnell confirmed previous advice to Ancon that the quality of its HDD works were currently the subject of investigation and that the alleged defects were significant and that, until the review was complete and Ancon’s works were found to be satisfactory, no further payments would be made to Ancon.
McConnell retained BAC Corrosion Control in June 2004 to review and make recommendations, inter alia, on the Strelley River crossing. BAC commented that the Strelley River pipe “just” failed under GasNet’s criteria and that it would follow from GasNet’s requirements that a more complex alternative test (as yet unspecified) had to be used or a cathodic protection expert engaged. BAC advised for various technical reasons that no remedial work was required to achieve cathodic protection for the 42 year design lifetime and it recommended that the HDD sections be accepted.
GasNet wrote to McConnell by letter dated 11 June 2004 stating that McConnell had so far failed to rectify the defective Strelley River crossing and requiring it to provide a plan for rectification. In mid-June 2004, McConnell excavated and repaired the defect identified by Southern Corrosion Control’s report of 12 May 2004 and decided to test again.
The resulting report from Southern Corrosion Control Services dated 6 July 2004 stated that it had repeated the DCVG survey of the Strelley River crossing, following excavation and repair of the coating fault found in the initial DCVG survey, and that this further survey was performed on 26 and 27 June 2004. The report said that the survey indicated that further coating faults existed beyond the limit of the current excavation towards the river’s edge. The report further stated that “at 13% the existing coating fault is beyond the specified 1% and further excavation and repair may be required”.
McConnell attempted repairs shortly thereafter but reached a point where it could dig no further without risking further damage to the pipe.
By letter dated 13 July 2004 from GasNet to McConnell, GasNet stated, inter alia:
“The Strelley River HDD coating has been repaired twice to date, due to defects found by the DCVG survey. Following its repair of the latest coating defects, [GasNet] undertook further DDCVG testing for its own purposes on 10 July 2004 and found two further indications of defects on the east side.
[The letter then referred to the many difficulties associated with further repairs and the likelihood that more defects might be discovered.]
Accordingly, you have mentioned that an open-cut crossing construction of the Strelley River and the abandonment of the existing HDD crossing may be a possible scenario for [McConnell], in lieu of excavating and repairing the existing HDD.
[the letter went on stress the importance of rectifying the defect prior to commencement of operation of the pipeline and requested McConnell to advise of its intentions in relation to rectification of the coating damage of the Strelley River crossing.]”
By letter dated 16 July 2004 from McConnell to GasNet, McConnell replied to GasNet’s letter of 13 July 2004. In relation to the Strelley River crossing, McConnell said:
“.. a coating integrity test has already been carried out in accordance with your prescribed procedure and as you are aware, the result fell into the “just fail” category, being between the values of 1 and 5 [microamps per square metre] per 1,000mV shift. Following this test, we have exposed and repaired a number of significant defects. A more recent DCVG test carried out by [GasNet] indicated further coating defects … however we can say with some confidence that the current demand of the section is likely to have been improved (reduced) by these coating repairs and may now be either be capable of a “pass” or possibly remaining a “just fail”.
[McConnell enclosed a copy of the BAC Corrosion Control report of June 2004.]
Given the results of the Strelley River coating integrity test, the coating repairs carried out subsequent to that test and the positive reports from cathodic protection experts .. [McConnell] sees no technical reason for duplication of the crossing….”
By letter dated 23 July 2004 from GasNet to McConnell, GasNet quoted advice from an independent expert concerning the BAC Corrosion Control report to the effect, inter alia, that:
“In reviewing the results of the tests and investigations at the Strelley and De Grey river crossings it is important to keep in mind that the pipeline is required to deliver reliable gas supply for at least the next 42 years. The results do conclusively show that extensive damage has occurred at Strelley River … [the independent expert’s advice then refers to inadequacies in relying upon cathodic protection measures.] Given these factors, there is a very real risk that the damage that has occurred could result in the need for major remedial action at some future time during the life of the pipeline. It is therefore recommended that the damage be repaired or a new section of pipe installed.”
GasNet’s letter concluded by asking McConnell to advise as to how it proposed to repair or replace the damaged pipe.
By letter dated 6 August 2004 from McConnell to Ancon, McConnell supplied to Ancon copies of various relevant reports on the Strelley River crossing that indicated that the Strelley River HDD “fails the criteria of clause 2.4.5” of the Technical Specification and that this gave rise to obligations on Ancon to rectify to McConnell’s satisfaction. The letter referred to McConnell’s costs to date of rectification but went on to say the works could not be rectified and that Ancon was extremely unlikely to be able to replace the pipe by HDD. McConnell reserved all of its rights.
As Barrows testified, “[McConnell] re-performed the Strelley River crossing using conventional pipe laying techniques during the period September-October 2004” and “this crossing satisfied all testing requirements … “.
Expert Evidence
Brian Martin, an experienced pipeline corrosion engineer, gave evidence on behalf of Ancon.
Mr Martin testified that there was a general industry practice that had begun in about 1994 in relation to the testing of pipe installed by HDD. He said that the coating test (current drainage test) was usually carried out within 2 days of the installation of the pipe for 3 reasons. First, the main contractor usually wanted to tie the pipe into the main pipeline as soon as possible and the test could not be carried out after the pipe was tied in. Secondly, the HDD sub-contractor usually wanted to demobilise as soon as possible but could not do so until after the test was carried out because his equipment was required to ensure that the hole was full of drilling mud and, if the pipe failed the test, it was required to pull the pipe out, clear the hole, and pull it back in. Thirdly, if the testing was delayed then the ground around the pipe would settle and consolidate so that it might not be possible to pull the pipe out and it was generally accepted that a week was the maximum time that should be permitted for this.
Mr Martin criticised the opinion expressed in an expert report by Dr Kogler, a witness called by McConnell, that the chance of a successful pipe retrieval even within one week was no greater than 50%. Mr Martin said that the assumptions upon which Dr Kogler’s opinion on this aspect was based were “not supported by hard evidence”. Mr Martin did not otherwise attempt to substantiate a contrary view save to say in substance that there was a very high probability that a pipe would be reinserted without coating damage if the drilling alignment was within the design radius.
In examination-in-chief, Mr Martin was asked whether the kind of severe defect that was detected in the Strelley River crossing by a DCVG test in May 2004 would have been detected by a coating integrity test carried out soon after the pipe had been pulled through. In the course of a somewhat discursive answer, Mr Martin said that “It is possible it wouldn’t pick up the [defect], [but] you would like to think that it would”. However, after further questioning, Mr Martin said that such a defect would probably have been detected. I found Mr Martin’s evidence on this point unimpressive.
On cross-examination, Mr Martin agreed that his specialty as a corrosion engineer was a different specialty to that of a drilling or mining engineer and that his expertise related to the cathodic protection of pipelines, the specification of test procedures for pipeline coatings and the carrying out and reviewing of corrosion testing of pipelines.
Mr Martin was asked whether it was the case that pulling the pipe out was only one option available when it had failed the coating integrity test. Mr Martin said that quite often people attempted to excavate in from each end hoping to find the defect without pulling out the pipe – sometimes that worked. Mr Martin was then asked whether it was the case that, if a current drainage test was a “just fail”, the cathodic protection designers could determine that the cathodic protection [to be] provided would be sufficient. Mr Martin said that if it was a “just fail” that certainly could occur. Mr Martin said that it was generally the case that the pipe would be pulled out if the test failed but that that was not necessarily always the case. He was then asked and answered as follows:
Q: .. if you had a pipe, a HDD pipe which was 440 metres long, and you were aware that there was a defect at 70 metres at a place near the bank of the river, it would be a lot easier to excavate that particular point and repair the pipe than to pull out the entire pipeline, wouldn’t it?
A: Absolutely.
Dr Kogler, an expert witness called by McConnell, has worked in the HDD industry since 1989 and currently works full time as an independent consultant for this industry. His PhD thesis was on the subject of horizontal directional drilling. His experience and expertise is extensive and impressive. His expert report was tendered in evidence and may be summarised as follows.
Dr Kogler said that it could be concluded from the daily drilling reports that Ancon encountered extremely hard granite approximately 60-230 metres from the entry point and that the actual drilling alignment in this area was deeper than the design profile and that as a result it could be assumed that the achieved minimum drilling radius was less than the design radius. He made a number of other criticisms of the procedures adopted by Ancon which, in his view, increased the risk for proper installation of the pipe.
Dr Kogler said that the common working practice for the timing of a post– installation coating test was shortly after the pull through[18] of the pipe, that is, within a few days. He said that it was only if this timeframe was kept that it was possible to react to a negative test result (damaged coating) in an economical way and undertake corresponding actions. He noted that this approach was reflected in the HDD sub-contract. He said that the inspection of the pipe coating at the Strelley River crossing was done later than usual in the HDD industry and that this may have limited the technical options available for dealing with the damaged pipe.
[18]In his expert report Dr Kogler referred to “pullback” rather than “pull through” but for convenience I have generally adopted the latter terminology.
Dr Kogler said that, if the coating test had been carried out immediately after pull through and had shown unacceptable damage to the coating, four major options would have been available:
1. Pullout-of-hole, repair of pipeline and pullback in the same borehole.
2. Pullout-of-hole, replacement of pipeline and pullback in the same borehole.
3. Pullout-of-hole, repair of pipeline and pullback in a new borehole.
4. Pullout-of-hole, replacement of pipeline and pullback in a new borehole.
Dr Kogler said that the retrieval of a pipeline previously pulled into a borehole was certainly “an extraordinary scenario” in this industry and only occurred when the pipeline showed major defects after installation. Time after pull through and the availability of appropriate equipment were both critical factors for the success of such an operation. He added that if the pull through operation had been slow, the pipe had got stuck and required pulling backward and forward to get it free again (as in this case), the chances for a successful pullout-of-hole were significantly less than in “normal” hole conditions.
Dr Kogler said that, due to difficult soil conditions in combination with what he assumed to be tight drilling radii and uncertain quality of hole cleaning during the reaming operation, he estimated that “the chance for a successful pipe retrieval even within reasonable time limits (i.e. after one week) and even with suitable equipment (sufficient numbers of dozers etc. ) [was] no greater than 50%.”
Dr Kogler said that the repair of a pipeline coating made sense if the damage was limited to certain areas and occurred only in reasonable numbers. If the damage was too severe, it was often not possible to carry out such repairs within a reasonable time frame and at acceptable cost. Dr Kogler said that the photographs showed that the damage to the Strelley River pipe was probably not limited to certain areas but was more or less along the whole pipe (deep, long scratches). He expressed the view that this would have made the repair of the coating technically difficult and not time and cost effective and he therefore did not see it as a realistic scenario for the Strelley River crossing.
Dr Kogler said that, for a substantial assessment of the possibility of repair of the damaged coating, it would have been necessary to be present on site when the pipe was uncovered. Accordingly he was unable to state a “final assessment or opinion” on this question.
In relation to the replacement of the damaged pipeline rather than its repair, Dr Kogler said that he did not know if suitable pipe was available and what the cost would have been to achieve such replacement. He was therefore unable, due to lack of information, to assess the possibility of the replacement of the pipe.
Dr Kogler said that, regardless of whether the damaged pipeline would have been repaired or replaced, it would have been necessary to conduct another pull through operation in the same borehole. He said that it could be regarded as “common” practice (although the scenario itself was very “uncommon”) to carry out at least one more cleaning run before a pipe was pulled again into the same borehole and that, depending on the results of such a run, further reaming and cleaning phases might have been necessary. Dr Kogler referred to what he saw as the difficulties in successfully “cleaning” the borehole but added that, in any case, the alignment was likely to have been unsuitable, or at least not very suitable, for this exercise. He said that, even with an optimised cleaning and pull through procedure, the uncertainty of the drilling alignment would have remained. Even with an acceptable alignment the chance for an undamaged coating after a second pull through attempt would only have been in the range of 50% but if the drilling alignment was inappropriate an additional pull through attempt would not have been recommended by him.
Dr Kogler concluded that it was uncertain whether it would have been possible to retrieve the damaged pipe and he estimated the chance of success to be no greater than 50%; that it was uncertain whether it would have been possible to repair the damaged pipe (within reasonable time and cost limits) but there was some indications that suggested that such repair would probably have been ineffective; that it was uncertain whether it would have been possible to replace the damaged pipe (within reasonable time and cost limits) due to lack of information; that it would have been possible to reinsert a repaired or replacement pipe in the same borehole but the chance of the coating being undamaged in such an operation was estimated to be about 50% (but only if the pre-cleaning procedure was adequate and the drilling alignment was suitable).
In cross-examination, Dr Kogler confirmed that it was best industry practice to conduct a coating integrity test soon after completion of the pull through of the pipe so that it could be ascertained whether or the pipe coating may have been damaged. He said that it was one option to pull the pipe out of the bore but that this was a rare scenario – but at least an immediate test allowed for the chance of doing this.
Dr Kogler considered that it was very probable that, if a coating integrity test had been conducted immediately after the pull through, a defect in the pipe would have been identified. He was then asked about a number of factors relevant to the question whether the pipe ought or could have been pulled out of the borehole (had damage been identified at that time) but I think that the substance of his answers were that he was unable to express a view being unfamiliar with the facts on the ground, as it were, but he remained emphatic that the pulling out the pipe was an unusual event.
Issues on the counterclaim
McConnell contended that Ancon was in breach of the HDD sub-contract primarily by virtue of its breach of obligations contained in the Head Contract that were imported into the HDD sub-contract by cl.3.2 thereof. Specifically, by cl.2.4.5 of the Head Contract, McConnell was obliged to repair “all defects greater than 1.0% IR” at its cost and this obligation became Ancon’s obligation under the HDD sub-contract. Additionally, McConnell pointed to cl.3.2.7 of the Head Contract which required the pipe and joint coating to be to GasNet’s approval and to cl.13.1 of the HDD sub-contract in which Ancon warranted, inter alia, that the works would be fit for the purposes intended and free of defects and deficiencies.
Ancon’s defences to the counterclaim were that:
(a) it denied that it was in breach of the HDD sub-contract;
(b) the damages claimed by McConnell were too remote;
(c) McConnell had failed to mitigate its loss;
(d) McConnell had waived its rights to rely on the relevant clauses in the HDD subcontract by not carrying out the required coating integrity test immediately after pull through;
(e) McConnell was estopped from relying upon the provisions of the HDD sub-contract or the provisions of the Head Contract.
Breach of HDD sub-contract
Ancon did not seek to resist the inevitable conclusion that, by virtue of the defects that had been detected in the pipeline, McConnell was in breach of its own obligations under the Head Contract. However, Ancon contended, despite its assumption under the HDD sub-contract of McConnell’s obligations under the Head Contract, that it was not itself in breach of the HDD sub-contract. Ancon submitted that this contention was correct because, upon a proper interpretation of the HDD sub-contract, Ancon had no outstanding contractual obligations whatsoever once it had left the site in the circumstance that McConnell had, in breach of the HDD sub-contract, failed to test the “integrity of the coating…immediately after installation of the directional drill, and before tying it in [to the rest of the pipeline]”, as was required under cl.1.2 of the Scope of Sub-contract Works (forming part of the HDD sub-contract). In effect, Ancon’s submission amounted to an argument that compliance with this testing requirement imposed on McConnell was a precondition to the continuance of any pre-existing obligation of Ancon in relation to the coating integrity of the pipeline.
I am unable to accept Ancon’s submissions in the above respects. Looking at the HDD sub-contract as a whole, and at this provision that has the effect of requiring McConnell to carry out a coating integrity test on the Strelley River crossing before tying that pipeline into the rest of the pipeline, I do not see any basis for treating the latter provision as overriding, or creating a pre-condition to the continuance of, Ancon’s express obligations to comply with the provisions of the Head Contract. There is no express provision to that effect and no necessary or reasonable basis for such an implication.
As I have said, McConnell was indeed in breach of the HDD sub-contract, as Ancon submitted, by failing to carry out a coating integrity test on the Strelley River crossing before tying the pipeline under the Strelley River into the rest of the pipeline. The question to be decided is not whether the provision itself circumscribed Ancon’s own obligations under the HDD sub-contract but whether McConnell’s breach of that provision provided any defence to McConnell’s counterclaim. I note that Ancon did not plead or contend that, by virtue of McConnell’s said breach of the HDD sub-contract, McConnell was liable in damages to Ancon with respect to the opportunity that Ancon had lost, (if any) to repair or replace the pipeline before leaving the Strelley River site. The Court was thus not directly asked to decide, except to the extent mentioned below under the heading of “mitigation”, whether Ancon had lost such an opportunity or to assess the “value” of that lost chance and to set off any such amount in diminution of McConnell’s damages. Rather, Ancon relied on a number of arguments in an attempt to establish an absolute defence to McConnell’s claim for damages. To those defences, I now turn.
Remoteness
Ancon submitted that McConnell’s damages, namely its costs of rectifying the Strelley River crossing totalling $832,265.65[19], were too remote because this rectification work was not foreseeable or not reasonably within the contemplation of the parties or within the contemplation of Ancon at the time of entering the HDD sub-contract as the likely result of a breach.
[19]There was no dispute as to quantum.
I am satisfied that the damages were not too remote. On the whole of the evidence before the Court, including the expert evidence, I am satisfied that it would have been within the reasonable contemplation of the parties or of Ancon that one likely consequence of the discovery of coating defects in an HDD crossing would have been the replacement of that crossing by McConnell. I would certainly not be satisfied on the evidence that the only likely consequence of the discovery of such defects that would have been within the reasonable contemplation of the parties or of Ancon was the pulling out of the pipe string from the hole and its repair and replacement within the same hole.
Mitigation
Ancon submitted that, by McConnell’s failure to carry out the required coating integrity test immediately after pull back and before tying in of the pipeline, McConnell had failed to mitigate its loss. Ancon submitted that the evidence showed that such a test carried out immediately after pull back would have detected a coating defect and that Ancon could then have pulled out, repaired, and replaced the pipe. Ancon submitted that, because McConnell had failed to carry out the required test at the required time, Ancon had not only been deprived of the opportunity to repair and replace the pipe in the same hole but, if it had had that opportunity, it would have done so. Ancon submitted that McConnell was not entitled to recover damages “caused by its own breach”. Further or in the alternative, Ancon submitted that, as McConnell had clearly failed to mitigate its loss and had not proved what the loss would have been if the test had been carried out, it was “open to the court to conclude that the cost to [McConnell] would have been nil because it was [Ancon’s] contractual obligation to repair the damage to the pipe.”
In my opinion what Ancon had to establish was that if McConnell had carried out an immediate coating integrity test that would probably have avoided McConnell’s incurring of the costs of replacing the pipe under the Strelley River because Ancon would probably have been able to remedy the defects at its own cost by then and there pulling out and repairing or replacing the pipe string in the same hole. In other words, there was conduct reasonably open and available to McConnell (indeed conduct that was contractually required) that was likely to have avoided McConnell’s loss.
I do not consider that the evidence supports the necessary finding that immediate integrity testing by McConnell probably would have resulted in the repair or replacement of the pipe in the same hole by Ancon thereby avoiding the costs of relaying the pipe that were in fact incurred by McConnell. Although it is possible that immediate testing would have avoided the damages suffered by McConnell, a number of matters adduced in evidence show, in my view, that it was more probable than not that even if the required coating integrity test had been carried out immediately, it would not have been possible to repair or replace the pipe in the same hole. Putting it at its lowest, I am not satisfied that it is more probable than not that such test would have avoided the damages suffered and, therefore, it cannot be concluded that the cost to McConnell would have been “nil” as Ancon submitted.
I would emphasise the following matters in that respect. I accept Dr Kogler’s uncontradicted evidence that the damage to the Strelley River pipe coating was such that it would have been technically difficult and not time and cost effective to repair it and his conclusion that the repair of the pipe was not a realistic scenario. As to the alternative, namely replacement rather than repair of the pipe, Dr Kogler said that he was unable to assess that possibility because he did not know if suitable replacement pipe was available or the cost of obtaining it. In that regard there was no evidence before the court that Ancon had any replacement pipe available or that such pipe was obtainable within the short time that would have been required for successful reintroduction of pipe into the same hole. I further accept Dr Kogler’s evidence as to the many uncertainties affecting a second pull though of pipe (whether repaired or replacement pipe) and, in particular, the difficulties likely to have been created by the fact that the alignment of the bore hole was likely to have been unsuitable, or at least not very suitable, for this exercise. The evidence does not establish that the drilling alignment of the bore hole was within the design radius – indeed the evidence is somewhat suggestive of the contrary.
I conclude that Ancon has not demonstrated that McConnell’s failure to do an immediate coating integrity test constituted a failure to mitigate or avoid its loss (or that such failure was the true cause of that loss).
Waiver and estoppel
Ancon submitted that McConnell had waived its rights under the HDD sub-contract by failing to carry out the required coating integrity test and, in particular, had thereby waived its rights as against Ancon to rely upon those provisions in the HDD sub-contract which imported the provisions of the Head Contract. This argument seems to me to be another version of Ancon’s contention that the obligation to carry out the test was a precondition to any reliance upon Ancon’s obligation to satisfy the requirements of the Head Contract. I reject the submission. I do not think that McConnell’s “election” not to carry out an immediate coating integrity test can be characterised as an election to waive all of its rights under the HDD sub-contract.
As regards estoppel, I do not think that McConnell’s failure to carry out an immediate coating integrity test constituted a representation to Ancon that McConnell would not rely upon all or any of the provisions of the HDD sub-contract or a representation to Ancon that McConnell considered that Ancon had no further responsibility in relation to the Strelley River crossing. In any event, there was no evidence that Ancon had any belief to either of those effects or that it had altered its position on the faith of any such belief.
For the foregoing reasons, I consider that McConnell succeeds upon its counterclaim against Ancon for damages in the amount claimed. It was conceded by McConnell that the unpaid balance of the price under the HDD sub-contract, namely, the sum of $496,724.80, had to be set off against those damages. Accordingly, McConnell’s damages claim of $832,285.65 is to be reduced by the sum of $496,724.80, leaving net damages in the sum of $335,560.85.
Ancon’s claim for extra payment of $134,409 pursuant to the HDD sub-contract as a result of encountering rock on the Strelley River crossing
Although Ancon referred to the two invoices totalling $134,409 in the particulars to paras 8 and 16 of its statement of claim, there were no specific allegations claiming entitlement to such extra payment on the basis of encountering rock. As McConnell pointed out, the HDD sub-contract was for a fixed price lump sum and, moreover, cl.10.5 (b) excluded any entitlement to extra payment by reason of site conditions. In the end, Ancon did not seek to substantiate this claim and I am satisfied that the claim fails.
Ancon’s claims under the Road and Rail sub-contract
In an opening outline of argument, Ancon said that the claim for monies owing under the Road and Rail sub-contract was a simple one. Ancon claimed that the terms of the Road and Rail sub-contract permitted it to claim $2000 per day for those days where its equipment and personnel were on site and available to carry on the work but were prevented from doing so either because of industrial action or inclement weather. Ancon referred to the Road and Rail sub-contract, Appendix “D” entitled “Subcontract Price” – that appendix contained a copy of an email from Ancon to McConnell dated 29 November 2003 in which Ancon confirmed its revised price for the Road and Rail bores on the Telford Pipeline Project and in which Ancon said that its Revised Price was $215, 000 “subject to the following previously agreed conditions: - … 9. Standby Rate - $2,000.00/day.”
Both parties relied on cl.20.1 of the Road and Rail sub-contract which provided:
“(a) The Subcontract Price is specified in Appendix “D”.
(b) The Subcontract Price of $215,000 is a fixed price lump sum and is not subject to any alteration except as provided in the Subcontract.”
McConnell submitted that, although a “standby rate” had been identified in the abovementioned email there was nothing in the sub-contract that established the conditions of Ancon’s entitlement to any such “standby rate”, there being no other reference to a “standby rate” anywhere in the sub-contract document[20].
[20]Apart from another email dated 24 September 2003 in Appendix D that stated that “our standby/plant stand-down rate is $6,400 per day”.
McConnell further contended that even if some contractual entitlement could be spelled out of the emails in Appendix D, that entitlement was inconsistent with cl.16 of the Road and Rail sub-contract which contained express provisions dealing with delays, extensions of time and delay costs which made it clear that Ancon’s only entitlement to delay costs could arise under those provisions. McConnell submitted that insofar as there was any inconsistency between cl.16 and Appendix D the former took precedence because cl.2.1(b)(iii) gave precedence to the provision that appeared first in the list of sub-contract documents.[21]
[21]Paragraph 2 of the sub-contract agreement contains a list of documents and the conditions of sub-contract are listed before the appendices.
In my opinion, McConnell’s submissions are correct. In any event, as McConnell pointed out, Ancon failed to produce any satisfactory evidence that its equipment or personnel were on site and available to carry out the work but were prevented from doing so. I consider that the claim fails.
The only other claim was for an amount of $27,500 as the unpaid balance of the price payable under the Road and Rail sub-contract. As I understood it this claim related to certain work that was not in fact performed and, in the end, Ancon did not press this claim.
Conclusion
Ancon’s claim should be dismissed and there will be judgment for McConnell against Ancon on the counterclaim in the sum of $335,560.85. I will hear submissions as to interest and costs.
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