APN DF2 Project 2 v Grocon

Not Restricted

IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL COURT

TECNOLOGY, ENGINEERING AND CONSTRUCTION LIST

S CI 2014 02826

APN DF2 PROJECT 2 PTY LTD	Plaintiff
v
GROCON CONSTRUCTORS (VICTORIA) PTY LTD	First Defendant
And
GROCON (SCOTS CHURCH) PTY LTD	Second Defendant

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JUDGE:	Vickery J
WHERE HELD:	Melbourne
DATE OF HEARING:	22 October 2014
DATE OF JUDGMENT:	27 November 2014
CASE MAY BE CITED AS:	APN DF2 Project 2 v Grocon and Ors
MEDIUM NEUTRAL CITATION:	[2014] VSC 597

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BUILDING CONTRACTS – Whether a term as to verification of progress payments to be inferred in a construction contract – Whether a term as to verification of progress payments is to be implied in a construction contract – Meaning attributed to ‘Actual Trade Cost’- Whether in its context means trade costs actually paid or merely payable - Construction of commercial contracts – Implication of terms in commercial contracts – Term implied as a matter of necessity and commercial efficacy in a construction contract – Observations as to construction contracts being prone to conflicts and disputes.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr A J Myers QC with Mr P Zappia of Counsel	Arnold Bloch Leibler
For the First Defendant	Mr J Gleeson QC with Mr R Craig of Counsel	Minter Ellison
For the Second Defendant	Mr D McAndrew of Counsel	Thompson Geer

HIS HONOUR:

Introduction

This proceeding arises out of a complex suite of transaction documents relating to the development, leasing and sale of improvements at 150 Collins Street Melbourne (the ‘Project’). The Project involved the second defendant, Grocon (Scots Church) Pty Ltd (‘Scots Church’), and the plaintiff (‘APN’) (which together with Scots Church are called the ‘Co-Developers’ or the ‘Principal’), being co-developers of land leased to APN under a 99 year lease from Scots Church Property Trust pursuant to a joint venture agreement dated 30 November 2011.

The Project further involved the design and construction of a 12 story office tower (the ‘Works’) by the first defendant, Grocon Constructors (Victoria) Pty Ltd (‘Grocon’ or the ‘Builder’ or the ‘Contractor’).

A dispute has arisen between APN and Grocon as to whether in its capacity as the contractor to APN, it is obliged to provide APN with copies of tax invoices and records for works and services carried out by subcontractors engaged by it which evidence actual payments made to those subcontractors in the course of the construction of the Works.

The Project proceeded under a complex suite of agreements involving the parties to this proceeding and third parties. However the most relevant for the determination of this proceeding are the following transaction documents (the ‘Transaction Documents’):

1. On 30 November 2011 a Joint Venture Agreement was entered into between APN and Scots Church in respect of the development, leasing and sale of the improvements on 150 Collins Street Melbourne (the ‘JV Agreement’);

2. On 15 May 2012, APN and Scots Church, as the Co-Developers and Principal, entered into a contract with Grocon, as the Contractor, for the development of 150 Collins Street. The contract was comprised in a Formal Instrument of Agreement and amended General Conditions of Contract for Design and Contract AS4300-1995 (incorporating Amendment No 1) (the ‘D&C Contract’). The Works comprised the design, construction, commissioning and completion of an office building on the Project site and ancillary retail component and any additional works required to be completed by the Principal including the construction, commissioning and completion but not the design of the Agreed Fitout Works under the Transaction Documents and associated works as more fully defined in the D&C Contract; and

3. On 4 July 2012, APN and Scots Church entered into a deed called the ‘150 Collins Street, Melbourne – Building Contract Side Deed’ with Grocon (the ‘Side Deed’). Amongst other things, the Side Deed provided for payment by the Contractor to the Principal or by the Principal to the Contractor of amounts calculated according to whether Actual Trade Costs (as defined), together with the Preliminaries Amount (as defined), were less than the contract price or whether the Actual Trade Costs and the Preliminaries Amount were more than the contract price.

By its Amended Statement of Claim dated 21 July 2014 the plaintiff, APN, seeks:

a) a declaration that the first defendant (‘Grocon’) is in breach of its contractual obligations under the D & C Contract and the Side Deed in relation to the Project;

b) a declaration that APN is entitled to records of actual trade, supplier and subcontract costs incurred and paid by Grocon for work undertaken or services provided for the purpose of the D&C Contract including bank statements, receipts, cheque books, recipient created tax invoices, bill notes and/or EFT transfer records; and

c) an order that Grocon forthwith provide to APN the documents referred to in sub-paragraph (b) above.

The breach of the D&C Contract and the Side Deed is alleged to arise from Grocon’s refusal to provide records of actual trade, supplier and subcontract costs ‘incurred and paid’ by Grocon for work undertaken or services provided for the purpose of the D&C Contract, which is alleged to be a contractual obligation under the Transaction Documents.

APN has identified five sources of the alleged term in issue:

1. Clause 2 of the Side Deed;

2. A term implied into the Side Deed for business efficacy;

3. Clause 42.1 of the D&C Contract;

4. A term implied into the D&C Contract for business efficacy; and

5. Clause 43.2 of the D&C Contract.

Grocon denies that it is under any contractual obligation to provide records of costs ‘incurred and paid’. Rather, to the extent that APN has entitlement and Grocon is under an obligation in this regard, they are defined by reference to costs that are ‘payable’.

There has been open correspondence between the parties in relation to the issues which are the subject of the present proceeding. A letter from APN dated 1 April 2014 claimed an entitlement to information from the Contractor, described as the ‘Requested Information’ which was set out in a schedule to the letter.

In reply on this issue, in relation to the request for Grocon to provide: ‘All records of payment by the Contractor to sub-contractors in relation to Project (i.e. Proof of payment). For example, certified copies of bank statements, receipts, cheque books and/or bill notes and/or EFT transfer records’ Grocon said in its letter dated 11 April 2014:[1]

Comment: I have previously stated that I have no problem with APN receiving relevant documents that relate solely to the project.
I do object to APN trawling through Grocon’s payment records that relate to the entirety of its business.
I have also indicated that I object to photocopying those documents and redacting all information which is not relevant to payments for the 150 Collins Street Project for the reason that it would take a great deal of time to collate such documents and APN would never accept a copy document that had been rendered substantially useless by the redaction of irrelevant information. Hence my proposal to employ an auditor to audit the payments.
Grocon is willing to procure an auditor to verify the amounts shown on an S/C Claim History Report for a subcontractor As paid back to the relevant payment document (such as a bank statement) and report back to APN.
[1]Written on behalf of Grocon, by the Deputy Chairman of Grocon Group Holdings Pty Ltd.

The Contractual Structure

The principal provisions of relevance embodied in the Transaction Documents are set out below.

The Joint Venture Agreement

The JV Agreement is referred to in the Side Deed. Recital G of the Side Deed expressly incorporates as its purpose, the purposes of clause 9.2 of the JV Agreement. Clause 9.2 of the JV Agreement provides that the appointment of the Contractor will be contingent upon:

a)the Head Contractor providing a price for the performance of the Works which is a cost only price consistent with the principles set out in Schedule 1 and otherwise acceptable to the Management Committee.
b)the Building Contract being in a form acceptable to the Management Committee and providing that the Head Contractor must:
i.submit all payment claims on an 'open book' basis;
ii.provide any security bond required to be provided under the Agreement for Lease;
iii.provide any security bond required to be provided under the Senior Financier Facility with the Senior Financier and/or Investment Agreement with the Investment Partner;
iv.enter into a tripartite deed with any Senior Financier and/or Investment Partner to enable that other party to ‘step in’ to the Building Contract on the occurrence of specified events of default;
v.enter into a side deed with the Co-Developers in relation to the processes for claims and costs (this side deed would not be part of the tripartite deed with any Senior Financier and/or Investment Partner);
vi.agree to enter into a novation deed with each Consultant whose agreement with the Co-Developers is approved for novation by the Management Committee; and
vii.where the Head Contractor is an entity related to Grocon, Grocon Constructors Pty Ltd guaranteeing the Head Contractor, in a form acceptable to APN, if reasonably required by APN.

[Emphasis added]

The principles set out in Schedule 1 of the JV Agreement include the following:

1.Objective is to deliver the construction at cost by way of open book tendering.[2]
2.Structure (including all jump forms, full protection systems and scaffold) at actual cost.

3. ……
4. Preliminaries of 13.2% ... Nil margin.
[Emphasis added]

[2]As to ‘open book’ arrangements, see the observations in Thiess Contractors Pty Ltd v Plocer (Gronny Smith) Pty Ltd [1999] 16 BCL 130, particularly at 136; Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd 120031 HCA 10 at [9] and Kane Constructions v Sopov [2005] VSC 237, [497].

By Recital E of the JV Agreement, it is contemplated that APN and Scots Church would ‘sell the Property as soon as it is advantageous to do so, which may be at, before or after Practical Completion.’ Accordingly, in such event, it was anticipated that the Co-Developers would profit from such a sale. Clause 23 provides a facility for the distribution of the proceeds of such a sale. Scots Church (being Grocon (Scots Church) Pty Ltd) was a company related to the Contractor, Grocon. So much is admitted by Scots Church in its defence to the Amended Statement of Claim. It may be inferred that this was a fact known to all parties at the time of entry into the Transaction Documents. Further, it may be inferred that the sale of the Property was understood by the parties at the time of entry into the Transaction Documents to be a source of future profit for the Grocon group of companies (which included the joint venturer Scots Church and the builder Grocon). No doubt for this reason, Grocon as the Contractor, was prepared to construct the Project works ‘at cost’, and the Transaction Documents were devised to achieve this.

The Side Agreement

The Side Deed is the agreement which operates to effect the delivery of the performance of the Works by the Contractor at cost as contemplated by cl 9.2 of the JV Agreement. Amongst other things, it sets out the processes for determining progress claims and costs, with an inbuilt mechanism for adjustment to facilitate the contractual objective of constructing the Project works ‘at cost’. In particular, the adjustment machinery of clause 2 operates through the following rights and obligations, which are here paraphrased:

a)Where ‘the amount payable ... to the [Builder] under the Building Contract’ is greater than ‘the total of the Actual Trade Cost and the Preliminaries Amount’ at the times stipulated for payment of progress claims under the D & C Contract, the difference is payable by the Builder to the Co-Developers (cl 2(a));
b)Where ‘the amount payable ... to the [Builder] under the D & C Contract’ is less than ‘the total of the Actual Trade Cost and the Preliminaries Amount’ at the times stipulated for payment of progress claims under the Building Contract, the difference is payable by the Co-Developers to the Builder (cl 2(c)).

[Emphasis added]

Clause 2 also confirms that the Contractor shall not be entitled to any margin for profit (cl 2(aXiiXB) and cl 2(cXiXB)).

Further, cl 2 also adjusts the rights and obligations between the Co-Developers by reference to the ‘Actual Trade Cost’. In this respect it provides that:

a)if ‘the Actual Trade Cost at the Assessment Date is below $96.3m (being the Fixed Contract Sum less the Preliminaries)’, as between APN and Scots Church, the first $3 million of that saving will be enjoyed solely by APN (clause 2(hxi)).
b)if ‘the Actual Trade Cost at the Assessment Date is above $96.3m’, as between APN and Scots Church, the first $3 million of ‘that overrun’ will be borne equally between APN and Scots Church and any cost overrun above that amount is to be borne wholly by Scots Church (cl 2(hxii) and (iii)).

Clause 2 of the Side Deed is in the following terms:

2 ACTUAL TRADE COSTS AND PRELIMINARIES
a) The Contractor agrees to pay to the Developer, to the extent that this is a positive figure:
i.the amount payable by the Developer to the Contractor under and in accordance with the Building Contract, including for variations; less
ii.the amount calculated as follows:

A. the total of the Actual Trade Cost and the Preliminaries Amount(on a drawdown basis consistent in percentage terms with the drawdown Profile in Schedule 12 of the Development Agreement) at the times as stipulated for payment of progress claims in the Building Contract (as adjusted by clause 2(f) below); and
B. any margin for profit payable by the Developer to the Contractor will be calculated at the rate of 0%.

b) The parties irrevocably agree that the amount payable by the Contractor under clause 2(2) (‘Set off Amount’) will be set off progressively against each progress claim under the Building Contract and is not required to be paid by the Contractor until the Developer makes a payment on account of the relevant progress claim at least equal to the Set Off Amount. The Set Off Amount will be dealt with by Grocon and APN in accordance with clause 2(e).
c) The Developer agrees to pay to the Contractor, to the extent that this is a positive figure:
i.the amount calculated as follows:

A. the total of the Actual Trade Cost and the Preliminaries Amount (on a drawdown basis consistent in percentage terms with the drawdown profile in Schedule 12 of the Development Agreement) (as adjusted by clause 2(f) below) at the times as stipulated for payment of progress claims in the Building Contract; and
B. any margin for profit payable by the Developer to the Contractor will be calculated at the rate of 0%; less
ii.The amount payable by the Developer to the Contractor under and in accordance with the Building Contract, including for variations

d)     The Developer must pay any amount payable under clause 2(c) as and when progress claims are due under the Building Contract.
e)   APN and Grocon agree that to the extent there are any net positive differences as calculated under clause 2(e) (including those caused by, for example, letting gains), that the net positive difference will be maintained by the Developer in its project budget cash flow and bank account as ‘Contractor's Contingency’ to be available for payment of any subsequent net negative difference (e.g. cost overrun) claimed by the Contractor at a later date until at least the Assessment Date (unless APN and Grocon otherwise agree in writing).
f)   For the avoidance of doubt the parties agree that variations issued by the Developer shall be treated as follows for the purposes of clauses 2(a) and 2(c) above:
i.Subject to (ii) below, if the variation is issued under the Building Contract in circumstances where the Contractor is entitled to be paid a sum of 15% referred to therein (in relation to Agreed Fit Out Works and other variations) such sum shall be retained by the Contractor and deemed to include any additional preliminaries in relation to that varied work.
ii.Notwithstanding (i) above, if the variation is an Extra Floor Variation the Contractor shall be entitled to charge the Actual Trade Cost plus the actual additional preliminaries (Extra Floor Preliminaries):

A. calculated in manner that is consistent with the list of items the Contractor is responsible for providing as part of its preliminaries as set out in Schedule 1; and
B. incurred the Contractor solely as a consequence of that variation (but noting that the Contractor will not be required to incur any loss in relation to its preliminaries solely as a consequence of that variation). The Extra Floor Preliminaries are to be paid to the Contractor over and above the Preliminaries Amount.

g) To the extent that either the Contractor's rights against APN or Grocon under the Building Contract or APN and Grocon's rights as Developers against the Contractor under the Building Contract are inconsistent with this clause 2 then, to the extent of that inconsistency, each of APN, Grocon and the Contractor irrevocably waives those rights as against each other, as applicable.
h) In consideration of the Contractor, APN and Grocon agreeing to fix the Preliminaries Amount in accordance with this Deed, Grocon and APN agree that the Joint Venture Agreement (including clauses 2.3, 16.2 and 23 of it) is varied as follows:
i.if the Actual Trade Cost at the Assessment Date is below $96.3m (being the Fixed Contract Sum less the Preliminaries Amount) the first $300,000.00 of that saving up to $93.3m is to be shared between APN and Grocon as follows:

APN 100%, Grocon 0%
(and any savings on the Actual Trade Costs beyond $93.3m are thereafter enjoyed as per Clause 2.3 of the Joint Venture Agreement.)
ii.subject to (iii) below, if the Actual Trade Cost as at the Assessment Date is above 6.3m that cost overrun will be shared between APN and Grocon as follows:

APN 50%, Grocon 50%
iii.if the Actual Trade Cost as at the Assessment Date is above 99.3m that cost overrun will be shared between APN and Grocon as follows:

APN 0%, Grocon 100%

i) For the purpose of sub-paragraphs (i), (ii) and (iii) of paragraph 2(h) Grocon and APN agree to ignore and exclude the cost impact on Actual Trade Costs of any variations under the Building Contract.
j) As long as the Contractor has used all reasonable endeavours to recover any additional Actual Trade Costs from its subcontractors, consultants and insurance after the issue of the Final Certificate under the Building Contract, if the Actual Trade Cost increases after the Assessment Date:
i.the Developer shall be obliged make a further payment of such additional costs to the Contractor in accordance with this Deed upon 30 days' written notice; and
ii.either APN or Grocon (as the case may be) will make any adjustment payment as between themselves for contribution at that time in accordance with the Joint Venture Agreement (as varied above).

Under clause 1.1 of the Side Deed:

a) The ‘Developer’ means APN and Grocon [Scots Church] who have the joint responsibility for delivery of the Development.

b) The ‘Fixed Contract Sum’ is defined as ‘the amount of $109,455,897 which is the amount payable to the [Contractor] under the Building Contract’.

c) The ‘Preliminaries Amount’ is defined as ‘an amount fixed at $13,155,897... for the scope of preliminaries items as set out in Schedule 1.’

d) The ‘Actual Trade Cost’ is defined as, inter alia, ‘the actual trade, supplier, consultant or subcontract cost payable by the [Builder] for work undertaken, material supplied, defects rectified or services provided to or on behalf of the [Contractor] for the purposes of the Building Contract ...’

e) The ‘Building Contract’ is defined as the design and construction contract between APN, Grocon [Scots Church], the Contractor and the Guarantor.

f) The ‘Assessment Date’ is defined as the later of ‘the issue of the Final Certificate (as described in the Building Contract)’ or ‘compliance by the [Contractor] with the Green Star and NABERS certification requirements under the Building Contract’.

The D & C Contract

The D & C Contract sets out the rights and obligations between the Co-Developers and the Contractor with respect to the design and construction of the Project.

It provided for the submission of payment claims on a monthly basis to a superintendent agreed by the parties, the assessment of each claim by the superintendent, the issuing of a certificate by the superintendent and payment each month by the principal.

Clause 2 of the Formal lnstrument of Agreement provides that it, together with the Amended General Conditions of Contract for Design and Construct, comprise the ‘entire contract’ between the parties. It also provides that the Contractor must carry out the Works (other than variations and ‘Agreed Fitout Works’) for a ‘Fixed Contract Sum’ being $109,455,897 (exclusive of GST), excluding any additions or deductions required to be made under the Building Contract.

Clause 3.1 of the General Conditions obliges the Principal to pay the Contractor the ‘Fixed Contract Sum’ for the Works. The trade breakdown of the ‘Fixed Contract Sum’ is set out in ‘Annexure Part M’ to the General Conditions. lt is by reference to this breakdown that progress claims are made for the value of work carried out pursuant to clause 42.1 of the General Conditions.

Clause 42.1 of the General Conditions requires the Contractor at the time of making payment claims (ie the 1st day of each month)1o ‘to deliver to the Superintendent (with a copy provided to the Principal) ‘evidence of the amount due by the Principal to the Contractor.’ Clause 42.1 requires each claim to clearly identify what amount claimed is part of the ‘Fixed Contract Sum’ and what amount claimed is due to adjustments for additions or deductions made pursuant to the Contract.

Clause 42.1 is in the following terms:

42       CERTIFICATES AND PAYMENTS
42.1     Payment Claims, Certificates, Calculations and Time for Payment
Subject to clause 42.1A, at the times for payment claims or upon completion of the stages of the work under the Contract stated in Annexure Part A and upon the issue of a Certificate of Practical Completion and within the time prescribed by Clause 42.5, the Contractor shall deliver to the Superintendent (with a copy provided to the Principal) claims for payment supported by:
a)        evidence of the amount due by the Principal to the Contractor;
b)        in respect of the first claim under this clause 42.1
i.        a quality assurance plan, satisfactory to the Superintendent;
ii.an environmental management plan, satisfactory to the Superintendent;

c)evidence of all insurances required under this Contract to the Superintendent's satisfaction;
d)such certificates as the Principal may reasonably require in respect of the design of the work under the Contract from the Contractor or any Consultant and subcontractors (as relevant) (including from Key Consultants in the form required by Clause 42.11); and

e) such information as the Superintendent may reasonably require.
Claims for payment shall include the value of work carried out by the Contractor in the performance of the Contract (and details of additions or omissions to the work, and the respective adjustment to the Fixed Contract Sum) to that time together with all amounts then otherwise due to the Contractor arising out of the Contract.
If the time for any payment claim under the preceding paragraph falls due on a day which is Saturday, Sunday, Statutory or Public Holiday the Contractor shall submit the claim either on the day before or next following that date which itself is not a Saturday, Sunday, Statutory or Public Holiday.
If the Contractor submits a payment claim before the time for lodgement of that payment claim, such early lodgement shall not require the Superintendent to issue the payment certificate in respect of that payment claim earlier than would have been the case had the Contractor submitted the payment claim in accordance with the Contract.
Within 10 Business Days of receipt of a claim for payment, the Superintendent shall assess the claim and shall issue to the Principal and to the Contractor a payment certificate stating the amount of the payment which, in the Superintendent's opinion, is to be made by the Principal to the Contractor and in such instance the amount the Principal proposes to pay to the Contractor or by the Contractor to the Principal. For the purpose of the Superintendent assessing the claim, the Superintendent may have reference to the trade breakdown schedule of the Fixed Contract Sum as set out in Annexure Part M.
The Superintendent shall set out in the certificate the calculations employed to arrive at the amount and, if the amount is more or less than the amount claimed by the Contractor, the reasons for the difference. The Superintendent shall also set out, as applicable, in any payment certificate issued pursuant to Clause 42, the allowances made for:
a)the value of work carried out by the Contractor in the performance of the Contract to the date of the claim;

b) amounts otherwise due from;
i. the Principal to the Contractor;
ii.the Contractor to the Principal;

c) amounts assessed under Clause 46.4 and not duly disputed;
d) amounts paid previously under the Contract;
e)amounts previously deducted for retention moneys pursuant to Annexure Part A; and
f)retention moneys to be deducted pursuant to Annexure Part A

arising out of the Contract resulting in the balance due to the Contractor or the Principal, as the case may be.
If the Contractor fails to make a claim for payment under this Clause 42.1, the Superintendent may nevertheless issue a payment certificate and the Principal or the Contractor, as the case may be, shall pay the amount so certified within 14 days of that Certificate.
Subject to the provisions of the Contract including clause 42.1A(b), within 14 days of issue by the Superintendent of the Superintendent’s payment certificate and within 14 days of the issue of a Final Certificate, the Principal shall pay to the Contractor or the Contractor shall pay to the Principal, as the case may be, an amount not less than the amount shown in such certificate as due to the Contractor or to the Principal, as the case may be. A payment made pursuant to this Clause 42.1 shall not prejudice the right of either party to dispute under Clause 47 whether the amount so paid is the amount properly due and payable and on determination (whether under Clause 47 or as otherwise agreed) of the amount so properly due and payable, the Principal or the Contractor, as the case may be, shall be liable to pay the difference between the amount of such payment and the amount so properly due and payable.
Payment of moneys shall not be evidence of the value of work or an admission of liability or evidence that work has been executed satisfactorily but shall be a payment on account only, except as provided under Clause 42.6.
Each payment claim and payment certificate delivered in accordance with this clause must clearly and separately identify what amount is part of:
a)the Fixed Contract Sum (ignoring any adjustment for additions or deductions made pursuant to the Contract); and
b) any adjustment for additions or deductions made pursuant to the Contract and, in that case, a break down of that amount by reference to which clauses of the Contract the entitlement to the addition or deduction arises under (other than Clause 40.5).

[Emphasis added]

Clause 43.2 permits the Principal in its absolute discretion to make payments directly to a subcontractor for ‘any moneys owing by the Contractor to a subcontractor.’

Clause 43.2 is in the following terms:

43.2 Payment of subcontractor or consultant by Principal
Despite any other provision of the Contract the Principal may in its absolute discretion (including where the Principal becomes aware that a subcontractor or consultant is entitled to suspend work which forms part of work under the Contract pursuant to the Security of Payment Act) pay out of any moneys due or to become due to the Contractor any moneys owing by the Contractor to a subcontractor or consultant in relation to the execution of work under the Contract and any payment under this clause 43.2 is deemed to have been paid to the Contractor under the Contract. If an amount equal to or greater than the amount paid by the Principal is on the Contractor's behalf is not or never becomes due by the Principal to the Contractor, the amount paid by the Principal is a debt due from the Contractor to the Principal. The Principal must not pay under this clause 43.2 any amount greater than the amount specified as payable in the declarations or documents provided to the Superintendent under clause 43.1.

Construction of Commercial Contracts

Most recently, in Electricity Generation Corporation v Woodside Energy Ltd & Ors,[3] the High Court summarised the principles for the construction of commercial contracts in the following terms:[4]

[T]his Court has reaffirmed the objective approach to be adopted in determining the rights and liabilities of parties to a contract. The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. A commercial contract is to be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.

[3](2014) 306 ALR 25 (Electricity Generation Corporation v Woodside).

[4]Electricity Generation Corporation v Woodside (2014) 306 ALR 25, 33 [35] (citations omitted) (French CJ, Hayne, Crennan and Kiefel JJ).

These principles will be applied in the construction of the transaction documents in this case.

Payment Obligations Under the D & C Contract and the Side Deed

By way of summary, the payment obligations of the parties in respect of the Project is set out in the D & C Contract, as amended by the Side Deed.

This results in the following payment regime:

1.Grocon is required to carry out the work under the D&C Contract for the fixed lump sum of $109,455,897;
2.Pursuant to clause 42.1 of the D&C Contract, progress claims must be delivered to the Superintendent supported by ‘evidence of the amount due’ and shall include the ‘value of the work carried out’;
3.Pursuant to clause 2 of the Side Deed, at the time for payment of progress claims under the D&C Contract:
a)Grocon is required to pay APN (to the extent that this is a positive figure) a set-off amount (‘Grocon Payable Amounts’) being:
i.the amount payable by APN to Grocon under and in accordance with the D&C Contract, less
ii.the total of the Actual Trade Cost (as defined under the Side Deed) and the Preliminaries Amount (as defined under the Side Deed); or

On the other hand, APN is required to pay to Grocon (to the extent that this is a positive figure) (‘APN Payable Amounts’) an amount being;
iii.the total of the Actual Trade Cost (as defined under the Side Deed) and the Preliminaries Amount (as defined under the Side Deed); less
iv.the amount payable by APN to Grocon under and in accordance with the D&C Contract.

Grocon Payable Amounts are:

1. set off against each progress claim under the D&C Contract and are not required to be paid by Grocon until APN makes a payment on account of the relevant progress claim at least equal to that amount; and

2. are kept by APN in its project budget cash flow and bank account as a ‘Contractor’s Contingency’ to off-set any future Grocon Positive Amounts;

APN Payable Amounts to be paid by APN are paid as and when progress claims are due under the D&C Contract.

‘Actual Trade Cost’ and ‘Preliminaries Amount’ are defined clause 1.1 of the Side Deed as follows:

Actual Trade Cost means:
a)the actual trade, supplier, consultant or subcontract cost payable by the Contractor for work undertaken, materials supplied, defects rectified or services provided to or on behalf of the Contractor for the purposes of the Building Contract (including any Agreed Fit Out Works as defined in the Building Contract, compliance with GBCA and NABERS Ratings); and
b)the amount payable to Agreed Project Consultants for the provision of services in respect of the Building Contract; and
c)any excess payable under the ACL – such amount to be treated as variation should it become payable.

[Emphasis added]
…
Preliminaries Amount means an amount fixed at $13,155,897 (including $155,897.00 for the ACL) (excl GST) for the scope of preliminaries items as set out in Schedule 1.

The payment structure under the D&C Contract and Side Deed therefore organised both the quantum and the timing of APN’s obligations to make payments to Grocon.

The pivotal question of construction however boils down to this: does the actual trade, supplier, consultant or subcontract cost payable by the Contractor for work undertaken etc. found in the definition of ‘Actual Trade Cost’ (as defined in clause 1.1 of the Side Deed) mean costs actually incurred and actually paid, or merely a cost incurred as a liability to pay, but not actually or necessarily paid.

This is a preliminary issue to be determined, because the answer will establish the context in which any document production obligations imposed on Grocon must be analysed.

Grocon’s Submissions on Construction of the Payment Obligation

Grocon correctly submitted that its entitlement to payment and APN’s liability to make payment is principally governed by the definition of ‘Actual Trade Cost’ in the Side Deed.

However, it also said that the right to payment so defined is not described by reference to costs actually ‘incurred and paid’ but rather to costs which are ‘payable’. It said that the word ‘payable’ has a clear and well-known meaning: ‘owed’, ‘due’ or ‘to be paid’.[5]e The word connotes an obligation to be discharged and not one that has been discharged. It pre-supposes that payment has not occurred but is required to occur.
[5]See the Macquarie Dictionary.

It followed from this submission, if accepted, that Grocon would be entitled to a payment from APN in respect of actual supplier, consultant and sub-contractor costs it has a liability to pay, and upon such liability arising, as opposed to it becoming entitled to payment only upon the relevant sub-contractor’s costs being actually paid.

Grocon submitted that its construction accords with the commercial and business-like meaning to be attributed to the word ‘payable’. This submission is also consistent with authority.[6]

APN’s Submissions on Construction of the Payment Obligation

[6]Marriott Industries Pty Ltd v Mercantile Credits Limited [1991] ACL Rep 295 SA 2 [10]; Peacock v Commonwealth Trading Bank of Australia [1979] 2 NSWLR 412, 416; Deputy Commissioner of Taxation v Peacock (1980) 2 NSWLR 130; Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1; Christopher Chronis Designs Pty Ltd v Citadin Pty Ltd (1997) 8 BPR 15,659; Helou v Mulligan Pty Ltd [2003] NSWCA 92 [27].

On the other hand, APN submitted that the ‘amount payable... to the Contractor under.. the Building Contract’ in the definition of ‘Actual Trade Cost’ (in clause 1.1 of the Side Deed) in its context means the ‘amount actually paid’. It submitted that the D&C Contract (being the ‘Building Contract’ referred to in the Side Deed) is defined by the Side Deed as ‘the design and construction contract’. Clause 3.1 of the D&C Contract provides that the amount payable to the Contractor is the ‘Fixed Contract Sum’ being the amount stipulated in clause 4 of the Formal Instrument of Agreement. The trade breakdown of the ‘Fixed Contract Sum’ is set out in ‘Annexure Part M’ of the D&C contract. lt is by reference to this breakdown that progress claims may be made by the Builder for the value of work carried out pursuant to clause 42.1 of the D&C Contract.

It was put that it is in this context that the expression ‘Actual Trade Cost’ is defined as the ‘amount payable...to the Contractor under the Building Contract’. It is defined as ‘the actual ... subcontract cost payable by the Contractor for work undertaken’ [Emphasis added].

It was submitted that the use of the word ‘actual’ makes it plain that the expression refers to the costs actually paid by the Contractor for work undertaken by a subcontractor in contrast to any amount that may have been allocated to that work under the D&C Contract in the ‘Fixed Contract Sum’, or in contrast to any amount that may have been initially agreed with a sub-contractor when the sub-contractor was engaged. Thus, the expression would capture any discount a sub-contractor may be willing to accept in relation to payment by reason of being promised further work by the Contractor or any other change in the commercial arrangement affecting payment for the work undertaken.

So construed, the expression gives effect to the objective of ensuring that the Contractor procures the performance of the Project Works at cost without any margin.

Conclusion on Construction of the Payment Obligation

In my opinion, the phrase ‘actual trade, supplier, consultant or subcontract cost payable by the Contractor for work undertaken, materials supplied, defects rectified or services provided to or on behalf of the Contractor for the purposes of the Building Contract …’ found in the definition of ‘Actual Trade Cost’ in clause 1.1 of the Side Deed, in its context means costs actually paid to a sub-contractor, and is not confined to costs for which there might merely be a liability incurred for payment.

First, the word ‘actual’ in the definition qualifies the word ‘cost’. The concept of an ‘actual cost’ connotes a cost that has not only been incurred, but a liability which has actually been discharged upon payment. Upon payment, it becomes an ‘actual cost’ and aptly falls within the definition.

In the second place, if upon payment, the cost becomes an ‘actual cost’ and is captured by the definition, a temporal element is clearly fixed by the event of payment. This assists to make the important contractual obligations to make progress payments between the Co-Developer and the Contractor work in a certain and well defined manner.

On the other hand, if liability to make a progress payment is to be governed merely by a liability incurred to make payment for ‘work undertaken, materials supplied, defects rectified or services provided’, real questions are likely to arise as to precisely when such a liability arose or arises. Such liabilities could, for example, be controlled by a wide variety of circumstances unique to each individual sub-contract transaction. Uncertainty in relation to the timing of the obligation to make progress payments between the Co-Developer and the Contractor in a D&C Contract of this type and scale, particularly given the large sums of money that are likely to become payable, is not consistent with the avoidance of commercial inconvenience and the production of a businesslike result.

Third, an amount which may initially be payable by Grocon to a sub-contractor for work undertaken, materials supplied, defects rectified or services provided, may not be the sum that is actually paid by it for such goods and services. A variety of commercial events, which are sometimes unforseen and cannot be predicted, may arise and operate to discharge or alter a liability to make payment to a sub-contractor in the course of a large scale construction project. In these circumstances, it makes no commercial sense for Grocon to be put in funds by payments from APN in respect of liabilities which may never in fact be matched with actual payment.

Fourth, the meaning of the expression ‘Actual Trade Cost’ as defined in clause 1.1 of the Side Deed, is informed by its context and the object of clause 2 of the Side Deed which is to effectuate the delivery of the performance of the Works by the Contractor under the Transaction Documents at cost.

For these reasons, I interpret the definition of ‘Actual Trade Cost, found in clause 1.1 of the Side Deed to mean and apply to costs actually incurred and actually paid by the Contractor for ‘work undertaken, materials supplied, defects rectified or services provided’ bv sub-contractors and the like.

APN’s Contentions on Inferred or Implied Term
Operation of the Side Deed

APN contends that its right to the payment records arises by reason of an inferred or, alternatively, implied term under the Side Deed. ln short, the gist of its argument is that such a right exists as an intended and necessary incident of the rights and obligations created by clause 2 of the Side Deed.

It was submitted that clause 2 of the Side Deed confers rights and creates obligations upon the Co-Developers by reference to, inter alia, ‘Actual Trade Cost’. That expression as defined by the Side Deed refers to information in the possession of the Contractor.

It was further said that clause 2 of the Side Deed confers rights upon APN and imposes obligations upon it (as a Co-Developer) by reference to:

(a) the ‘amount payable ... to the [Builder] under ... the Building Contract’; and

(b) the ‘Actual Trade Cost’.

If the former amount (a) exceeds the latter (b), a payment is required to be made by the Contractor to the Co-Developers. On the other hand, if the latter amount (b) exceeds the former (a), a payment is required to be made by the Co-Developers to the Contractor.

It follows, so it was put, that it is to be inferred from clause 2 of the Side Deed (or implied into it) that records evidencing ‘Actual Trade Cost’ will be provided by the Contractor to the Co-Developers to enable them to determine and exercise their rights and obligations under clause 2. Without the provision of such records APN (as a Co-Developer) would not be able to determine and verify any amount required to be paid to it or by it under clause 2 of the Side Deed.

Alternatively, it was submitted that a term to such effect is to be implied into the Side Deed as a matter of business efficacy. The implication of such a term satisfies the legal requirements for the implication of terms into a commercial contract.

Clause 42.1 of the D & C Contract

Clause 42.1(a) of the D&C Contract requires the Head Contractor to support claims for progress payments by ‘evidence of the amount due’. Tax invoices generated for work carried out by sub-contractors and records of payments made to sub-contractors were submitted to constitute ‘evidence of the amount due’ within the proper meaning of that expression.

Alternatively, a term ought to be implied to that effect to give clause 42.1(a) business efficacy.

Clause 43.2 of the D & C Contract

Grocon submitted further that Clause 43.2 of the D&C Contract confers a right upon the Principal (ie the Co-Developers) to pay ‘out of any money due or to become due to the Contractor any moneys owing by the Contractor to a subcontractor ... in relation to the execution of work under the Contract and [such] payment '… is deemed to have been paid to the Contractor ...’.

It was said that this provision contemplates that the Contractor will supply the Principal with tax invoices and records of payment so that the Principal can exercise the right conferred upon it. The right to provide such documents can be inferred from clause 43.2 or implied to give that clause business efficacy.

Grocon’s Contentions on Inferred or Implied Term

The starting point for Grocon was its contention that it is not obliged to provide records of actual payments to sub-contractors essentially because the expression ‘Actual Trade Cost’ is defined by reference to costs that are ‘payable’ being ‘costs in respect of which there is an obligation or liability to pay rather than costs in respect of which the obligation or liability has already been discharged’.

It says that there is no basis for any of the inferred terms as contended for by APN.

As to any implied term, it says that the well-defined rules as to the implication of contractual terms have not been met in this case.

Implication of Contractual Terms

Terms may be implied into contracts by law or by fact.

The present matter is not a case where the Plaintiff seeks to imply a term by law, as when the law has determined that a particular term should be implied either universally or into all contracts of a particular type, having regard to the nature of the legal relationship and reasons of policy.

Rather, the Plaintiff puts its case on the basis of a term to be implied ‘in fact’, being a term necessary for the contract to work in the way that the parties, as reasonable people, must have intended it to work.[7]
[7]The Moorcock (1889) 14 PD 64.

In Codelfa Construction Pty Ltd v State Rail Authority of NSW[8] Mason J adopted the now well established conditions necessary for implying a term of this kind as set out by the majority in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council:[9]

1.it must be reasonable and equitable;
2.it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
3.it must be so obvious that ‘it goes without saying’;
4.it must be capable of clear expression;
5.it must not contradict any express term of the contract.

[8](1982) 149 CLR 337, 347 (‘Codelfa’).

[9](1977) 180 CLR 266 (Privy Council). However, the less stringent test in Byrne and Frew v Australian Airlines Ltd(1995) 185 CLR 410 has been held to apply to informal contracts.

His Honour, in Codelfa, contrasted the implication of a term into a contract with the rectification of a contract, in the following passage, and in so doing spelled out the rationale for the implication of an ‘in fact’ contractual term:[10]

The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention.

[10]Codelfa (1982) 149 CLR 337, 346.

However, his Honour sounded a note of caution in his discussion of the basis for the implication of a term in the following passages:[11]

For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.
Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. …

[11]Codelfa (1982) 149 CLR 337, 346.

I will proceed to apply the principles of Codelfa to the facts of this case, noting that the transaction documents under examination provided a formal, detailed, and at least on their face a comprehensive, set of contractual arrangements.

‘Open Book’ System or Process

The concept of ‘Open Book’ tendering is referred to in two key parts of the transaction documents:

(a)In Schedule 1 of the JV Agreement [between APN and Scots Church as the Co-Developers], which provides under ‘Schedule 1 – Building Contract Pricing Principles’ the following: ‘1. Objective is to deliver the construction at cost by way of open book tendering’

[Emphasis added] and
(b)In Schedule 2 of the Side Deed [between APN and Scots Church as the Co-Developers under the JV Agreement and Grocon as the Contractor], which provides under ‘Schedule 2 –Subcontract Selection Process’ the following: ‘Open Book Tendering – In relation to the objectives contained in Schedule 1 of the Joint Venture Agreement and Clause 15.2 of the Agreement for Lease the parties agree that the following JV principles and Westpac delivery requirements will apply: JV Open Book Tendering Process Principles’ [then follow a list of items to be addressed which permits the Co-Developer to participate in the approval and appointment of sub-contractors].
[Emphasis added]

Thus the Contractor, Grocon, specifically acknowledge in the Side Deed the objective set out in Schedule 1 of the JV Agreement to ‘deliver the construction at cost by way of open book tendering’.

As to an ‘open book’ system in a construction contract, the observations of Hayne J in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd[12] are instructive. His Honour explained the concept in the following passage:[13]

[9] In 1989, Placer made a schedule of rates contract with the respondent (‘Thiess Contractors’) for mining at Granny Smith. That contract was for a fixed term expiring on 31 December 1992. In 1991, before the contract expired, Placer proposed a new form of contract with Thiess Contractors. Under the proposal, which the parties referred to as a proposal for a ‘partnering’ contract, the parties would agree upon the costs of carrying out mining operations. Placer would pay Thiess Contractors charges based on those costs, to which there would be added an agreed profit margin of 5 per cent. What was proposed was that rates for carrying out the various mining operations (drilling and blasting the ore body, excavating material, loading it into trucks and hauling it to the crusher or waste dumps) would be derived from an ‘open book system’. That is, the proposal was that Thiess Contractors would open its books to Placer and disclose the way in which it derived its rates for using particular pieces of equipment and carrying out particular work. Calculation of the rates would take account of costs of owning and operating equipment and of the conditions encountered in performing the work. Rates would be adjusted periodically.
[Emphasis added]

[12](2003) 196 ALR 257 (‘Placer (Granny Smith) v Thiess Contractors’).

[13]Placer (Granny Smith) v Thiess Contractors (2003) 196 ALR 257, 259

A finding made by Warren CJ as to the approach taken by a building superintendent in Kane Constructions v Sopov[14] is also consistent with that taken by the High Court in Placer (Granny Smith) v Thiess Contractors. Her Honour found as follows as to what a building superintendent [Jeffrey] said about an ‘open book’ process:[15]

In his witness statement, Jeffery stated that in recording the costs to complete, costs were calculated from an ‘open book’ process provided by Sopov. By ‘open book’, Jeffery said that this meant that he ‘inspected invoices and records of payment being BPay, MasterCard statements, receipts, cheque books, bill notes and NAB bank statements on a regular basis as being evidence of the completion costs’.

[14][2005] VSC 237 (Unreported, 30 June 2005 ).

[15]Kane Constructions v Sopov [2005] VSC 237 (Unreported, 30 June 2005 ) [497].

Mr Jeffrey’s description of the ‘open book’ process referred to in his evidence was not found wanting by the Chief Justice.

Accordingly, an ‘open book’ system or process in construction contracts may be taken to mean a system or process whereby the accounting records of one party are to be made available for inspection by another party to assist in arriving at a calculation of payment obligations under the construction contract, whether such obligations be by way of payment on a rates basis for the use of equipment, the supply of goods and materials or the carrying out of work, or the calculation of costs to complete, or indeed any other payment obligation or component of administration arising under a construction contract.

The specific acknowledgment of Grocon in the Side Deed of the objective set out in Schedule 1 of the JV Agreement, which included the objective to ‘deliver the construction at cost by way of open book tendering’ provides an element of the surrounding circumstances known to both APN and Grocon and the commercial purpose or objects to be secured by the contract constituted by the D&C Contract, as amended in relation to payment, by the Side Deed.

Whether any Obligation for Grocon to Provide Documents is to be Inferred from the Contractual Terms

However, even in this context, I am not satisfied that any obligation for Grocon to provide the documents sought by APN arises by way of inference either under clause 2 the Side Deed; clause 42.1 of the D&C Contract; or clause 43.2 of the D&C Contract.

Clause 2 of the Side Deed contains no provision as to the verification of a payment claim or the adjustment mechanism set out.

Clause 42.1(a) of the D&C Contract, although it requires the Contractor to supply ‘evidence of the amount due by the Principal to the Contractor’ in making a payment claim and include the ‘value of the work carried out’, stipulates nothing of the nature of the evidence that the Contractor is required to proffer.

Clause 43.2 of the D&C Contract contains no requirement for verification.

It remains to consider whether any such obligation ought to be implied ‘in fact’. In considering this question, the term formulated by APN which it contends ought to be implied as a term into clause 2 of the Side Deed, which in turn amends the D&C Contract, is as follows:

APN is entitled to records of actual trade, supplier and subcontract costs incurred and paid by Grocon for work undertaken or services provided for the purpose of the D&C Contract including bank statements, receipts, cheque books, recipient created tax invoices, bill notes and/or EFT transfer records (the ‘Implied Term’).

Whether Implied Term Satisfies Codelfa Principles
Reasonable, Equitable and Necessary

The Implied Term is necessary for the contract to work in the way that the parties, as reasonable people, must have intended it to work.

In the first place, it would be inequitable for one party to the contractual payment process (Grocon) to have full access to all the necessary accounting records to determine and satisfy itself whether the other party (APN) should pay, or be paid, a progress payment in a particular sum, while the other party (APN) is denied such a facility. It would be unreasonable and unfair for the process, in essence, to become a unilateral determination of one party to the transaction which is conducted behind ‘closed doors’ on the basis of material not provided to the other party.

For this reason it is necessary for records evidencing ‘Actual Trade Cost’ to be provided by the Contractor (Grocon) to the Co-Developers (which includes APN) to enable them to determine and exercise their rights and obligations under clause 2 of the Side Deed. Without the provision of such records APN (as a Co-Developer) would not be able to determine and verify any amount required to be paid to it or by it under clause 2 of the Side Deed.

Accordingly, the Implied Term is reasonable and necessary to provide an equitable balance in the payment process.

In the second place, the particular context in which the Transaction Documents must operate to govern a construction project, points strongly to the necessity for the Implied Term. Construction projects are fertile ground for conflicts and disputes.[16]
[16]Gerber and Ong Best Practice in Construction Disputes – Avoidance, Management and Resolution, (LexisNexis Butterworths 2013) 5.

It is widely accepted that each construction project is a unique endeavour.[17] As such, each is a risky venture, and therefore is vulnerable to disputation. This is so because every construction project, whether large or small, is something of an experiment. As has been said:[18]

… [t]he construction of every capital asset involves unique design, procurement and construction challenges. Different location and site conditions, construction methods, equipment and materials, and the assembly and management of a team of people to design, procure and construct each asset invariably mean the construction process is one of creating a prototype.

Further, every construction project involves people as a principal resource. As to the propensity for the human species to generate conflict, I draw upon the wisdom of His Holiness the Dalai Lama who has explained:[19]
As long as human beings have a conscience and intellect to think about the future, definitely there will be conflicts. Conflicts are made by human beings and methods to solve them must be created through human intelligence. It is wise to solve conflicts through dialogue, not through weapons.

[17]Gerber and Ong Best Practice in Construction Disputes – Avoidance, Management and Resolution, (LexisNexis Butterworths 2013) 6.

[18]See Cooperative Research Centre for Construction Innovation, Guide to Leading Practice for Dispute Avoidance and Resolution: An overview (2009) cited in Gerber and Ong Best Practice in Construction Disputes Avoidance, Management and Resolution, (LexisNexis Butterworths 2013) 7.

[19]His Holiness the Dalai Lama on 29 November 2000, in E Hammerich, Meeting Conflicts Mindfully, (Danish Centre for Conflict Resolution 2001), available at: < cited in Gerber and Ong Best Practice in Construction Disputes – Avoidance, Management and Resolution, (LexisNexis Butterworths 2013) 7.

It is also recognised that good communication on a construction project is one of the keys to preventing conflicts escalating to dysfunctional, costly and consuming disputes, which inevitably inflict a detrimental impact on a project. Conversely, poor communication is one of the key elements in generating construction disputes.[20]
[20]Gerber and Ong, Best Practice in Construction Disputes – Avoidance, Management and Resolution, (LexisNexis Butterworths 2013) 49-51.

The detailed conflict resolution processes in the D&C Contract (clause 47) and in the Side Deed (clause 8.3) point to the parties being mindful of the need to cooperate in their joint endeavour on this project, and to maximise the opportunities to resolve conflicts in a non-combative manner so as to avoid litigation, as far as it is possible to do so.

The timely provision of documentary records which provide information and evidence in support of Actual Trade Costs incurred and paid by the Contractor as part of the payment regime in the present D&C Contract, as amended by clause 2 of the Side Deed, can be seen as a reasonable and equitable means to reduce the risk of conflicts arising and escalating to disputes which can only be resolved through litigation. This advantages the parties to the contract.

The open exchange of records will also act as an aid to good decision-making and promote confidence in the determination that is made. This too is of advantage to the parties. Borrowing from the now well-developed concepts of administrative law, decisions made under a contract in the course of its administration which affect the rights, interests and legitimate expectations of a party in a direct and immediate way likewise ought to be made fairly.

In this case fairness demands that, on request, APN ought to be furnished with the evidence and materials which are claimed to found its obligation to make a progress payment, or alternatively, which may found its right to receive a payment, and in either case the quantum of the payment to be made or received.

The obligation to supply a particular group of documents (as defined in APN’s claim for relief), which may be inferred would be likely to be generated as the Project proceeds, and which by their very nature are likely to come into the possession or control of the Contractor as the Project proceeds, provides definition to the obligation of verification and further narrows the ambit for dispute.

If litigation was to be the only resort to resolve the payment obligations under the Side Deed in the event of disagreement, then no doubt, the documents presently sought by APN could be compelled to be produced on discovery. Discovery can be appropriately managed in litigation. However, no reasonable business person would accept the discovery processes in litigation as an appropriate way to administer a construction contract, when litigation should be relegated to a last resort, as the dispute resolution provisions in the Transaction Documents require.

Business Efficacy

Given that the phrase ‘actual trade, supplier, consultant or subcontract cost payable by the Contractor for work undertaken, materials supplied, defects rectified or services provided to or on behalf of the Contractor for the purposes of the Building Contract …’ found in the definition of ‘Actual Trade Cost’ in clause 1.1 of the Side Deed, in its context means costs actually paid to a sub-contractor, and not costs for which there might merely be a liability incurred for payment, business efficacy demands that some evidence of payment be provided to verify the obligation to make payment to, or receive payment from, the Contractor on an ongoing basis.

This is particularly so, given that documentary evidence as to payments to sub-contractors is likely to be generated and in the possession and control of only one party to the D&C Contract, as amended, namely the Contractor, Grocon.

The timely provision of defined documentary records which provide information and evidence in support of Actual Trade Costs incurred and paid by the Contractor as part of the payment regime in the Transaction Documents, are also to be seen as a tool to give business efficacy to the payment regime and support its intended harmonious and efficient operation, thereby reducing the potential for costly disputation and litigation arising from a lack of documentary evidence.

In a practical sense, the payment provisions under the Side Deed, would not be effective without the Implied Term. On the contrary, they would be productive of disputes which could escalate to litigation.

Obviousness

When the need for the term is considered in the context as I have described it, the necessity for it becomes obvious to the point that the existence of such a term ‘goes without saying’.

Clear Expression

The Implied Term, is capable of being given expression in an acceptably clear fashion.

Consistency

The Implied Term, is not inconsistent with the D&C Contract or the Side Deed.

Indeed, it directly supports and supplements the payment regime provided in the D&C Contract, insofar as it is amended by the Side Deed. This is particularly so in relation to the obligation accepted by the parties to the D&C Contract under clause 42.1, where payment claims are to be supported by ‘evidence of the amount due by the Principal to the Contractor’ and are required to include the ‘value of the work carried out by the Contractor in the performance of the Contract …’.

Further, the Implied Term is consistent with the ‘open book’ system or process referred to in the Side Deed, being the objective set out in Schedule 1 of the JV Agreement, which included the objective to ‘deliver the construction at cost by way of open book tendering’.

Analysis and Conclusions

I find that the Implied Term is a term of the Side Deed, which in turn amends the D&C Contract.

It follows that Grocon finds itself in breach of the Implied Term by failing to provide these documents to APN on its request.

Discretionary Matters

A principal objection of Grocon is that APN is not entitled to documents or parts of documents in the possession of Grocon which go beyond providing proof of payment by the Contractor to subcontractors. The exercise in identifying the relevant documents and parts of documents for this purpose, and time and expense required to appropriately redact documents which contain irrelevant parts (the ‘Document Provision Exercise’), bears upon the discretion as to whether to grant the declaratory relief which is sought, and if it is to be granted, upon what appropriate terms.

In my opinion, any necessity to undertake the Document Provision Exercise, should not be a reason to deny to APN the relief it is entitled to.

However, in circumstances where both parties have the potential to benefit from the Document Provision Exercise which will assist in the proper administration of their agreement, it is appropriate to grant relief on condition that APN should share the reasonable costs of Grocon in undertaking this exercise. Such costs should be assessed, in default of agreement, by the nominee of the President of the Law Institute of Victoria, with the costs of any such assessment being borne by the parties in equal shares.

Disposition and Orders

It will be declared that

(a)the first defendant is in breach of its contractual obligations under the D&C Contract, as amended by clause 2 of the Side Deed, in relation to the Project;
(b)a term is implied into the D&C Contract, as amended by clause 2 of the Side Deed, pursuant to which the plaintiff is entitled to be provided with and examine records evidencing actual trade, supplier and subcontract costs incurred and paid by the first defendant for work undertaken, materials supplied, defects rectified or services provided to or on behalf of the first defendant for the purposes of the D&C Contract including bank statements, receipts, cheque books, recipient created tax invoices, bill notes and/or EFT transfer records.

Subject to the condition which follows, it will be further ordered that the first defendant, as soon as practicable, provide to the plaintiff the documents referred to in sub-paragraph (b) above which presently are in its possession or control or which subsequently come into its possession or control.

In order to satisfy the entitlement of the plaintiff referred to in sub-paragraph (b) above, if it is necessary for the first defendant to engage in an exercise to identify relevant documents or parts of documents for this purpose and to appropriately redact documents which contain irrelevant parts, the plaintiff is to bear 50% of the reasonable costs of the first defendant in undertaking this exercise. Such costs are to be assessed, in default of agreement, by the nominee of the President of the Law Institute of Victoria, with the costs of any such assessment being borne by the parties in equal shares.

Before authenticating the Order, I will hear from the parties as to its precise terms and as to the costs of the proceeding.

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27 November 2014