Built Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd
[2021] QSC 224
•3 September 2021
SUPREME COURT OF QUEENSLAND
CITATION:
Built Qld Pty Ltd v Pro-Invest Australian Hospitality Opportunity (ST) Pty Ltd [2021] QSC 224
PARTIES:
BUILT QLD PTY LIMITED
ACN 108 064 099
(plaintiff)
v
PRO-INVEST AUSTRALIAN HOSPITALITY OPPORTUNITY (ST) PTY LIMITED (FORMERLY KNOWN AS AUSTRALIAN HOSPITALITY OPPORTUNITY (ST) PTY LTD) AS TRUSTEE FOR THE PRO-INVEST AUSTRALIAN HOSPITALITY OPPORTUNITY (BRS SPRING HILL) TRUST
ACN 163 479 221
(defendant)FILE NO/S:
BS No 5426 of 2017
DIVISION:
Trial Division
PROCEEDING:
Claim
ORIGINATING COURT:
Supreme Court of Queensland
DELIVERED ON:
3 September 2021
DELIVERED AT:
Brisbane
HEARING DATE:
28 September 2020 to 14 October 2020; 12 November 2020 to 13 November 2020
JUDGE:
Williams J
ORDER:
1. Once the parties have had an opportunity to consider these reasons, the parties are to confer to agree on a timetable for directions on the following:
(a) the parties confer and agree on the headings and structure (agreed form) of further submissions to be provided as to the appropriate orders to be made in light of these reasons.
(b) each party is to provide further written submissions in the agreed form, not more than 25 pages (including attachments).
2. The draft directions should be provided to my Associate. If draft directions cannot be agreed, then each party is to provide draft directions and a brief explanation for the disagreement.
3. If the parties consider that any additional findings of fact are required at this stage, these should be identified in the written submissions. The written submissions should also address interest and costs.
CATCHWORDS:
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – THE CONTRACT DOCUMENTS – THE INTERPRETATION OF THE CONTRACT DOCUMENTS – where the parties entered into a Formal Instrument of Agreement on or about 29 April 2015 – where Schedule 1 outlines the documents which constitute the contract documents – where the contract documents include the Formal Instrument of Agreement, the General Conditions and Annexures Part A to P – where Annexure Part O contains clarifications – where clause 1(u) of Annexure Part O of the contract provides that work under the contract includes the contractor’s alternative proposal for structural and mechanical systems on the basis that the contractor meets the performance requirement of the tender drawings and specifications – where the meaning of “performance requirement” is in dispute – where the plaintiff contends that not every aspect of the tender drawings and the specification amounts to a performance requirement – where the defendant submits that the performance requirements are to be found in the tender drawings and the specification – where the plaintiff contends that it is necessary to have regard to extrinsic evidence to identify the “alternative proposal” that the plaintiff was obligated to install – where the plaintiff contends that the words “alternative proposal” used in the contract is a reference to a two pipe VRF heat pump system, which cannot provide mode control to each guest room – whether extrinsic material is admissible to interpret the words “alternative proposal” contained in clause 1(u) of Annexure Part O of the Contract – whether, on the proper construction of clause 1(u) of Annexure Part O, mode control was a performance requirement of the tender drawings and the specification
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – VARIATIONS – GENERALLY – where the plaintiff and the defendant entered into a contract for the design and construction of a hotel in April 2015 for the sum of $33,366,027.00 – where the hotel includes guest rooms, food and beverage facilities, front of house facilities, back of house facilities, two basement level carparks and a guest gymnasium – where the plaintiff contends that the mechanical works, including the air conditioning and heating system, did not require the mechanical system installed by the plaintiff to provide for mode control in each individual room – where the plaintiff submits that the defendant’s requirement notified in correspondence dated 11 August 2016, 16 August 2016 and 17 September 2016 (individually or together the “Mechanical Direction”) that the mechanical system being installed be changed was a direction to undertake a variation under the contract – where the defendant disputes this and contends that the notices required that the plaintiff comply with its obligations under the contract and install an air conditioning system in accordance with the contractual requirements – whether the plaintiff was required to design and install an air-conditioning system allowing mode control in each room – whether the notices given in August and September 2016 were a direction to the plaintiff to undertake a variation or alternatively constituted a notice to rectify defective work
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – VARIATIONS – GENERALLY – where the plaintiff contends that by correspondence there was an express or implied direction for the plaintiff to supply and install certain bathroom fixtures and as a result, this amounted to a variation within the meaning of the contract – where the plaintiff contends that the plaintiff is entitled to an assessment of the costs of the variation – where, if there is no entitlement to the costs of the variation, the plaintiff contends that the defendant is estopped from relying on or has waived its right to insist upon satisfaction of clause 36.1 of the contract with respect to this variation – where the defendant contends that the plaintiff is not entitled to an increase in the contract sum in respect of the alleged bathroom variation – whether there was a change in the work to be undertaken within the scope of clauses 36.1(a) to (e) of the contract – whether there was a direction to perform the variation as required by clause 36.1(f) of the contract – whether the correspondence relied upon by the plaintiff amounts to a direction to perform a variation pursuant to clause 36.1(g)
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – VARIATIONS – LIABILITY TO PAY – where a number of variations have been approved and certified by the Superintendent – where it is accepted that the work has been carried out and the defendant has paid the plaintiff the amounts claimed, except for the amount identified as representing 7.5 per cent of the certified value of the variations – whether on a proper construction of clause 36.4(d), the plaintiff is entitled to an additional 7.5 per cent for preliminaries
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – TIME – LIQUIDATED DAMAGES – where the defendant seeks payment of the amount of $196,623.21 by way of additional liquidated damages calculated as a result of the correction of an error in calculating the date for practical completion – where the defendant contends that in calculating the adjusted date for practical completion a five day work week was used when a six day work week should have been used – where the plaintiff contends that the defendant is not entitled to the additional amount of liquidated damages – whether the defendant is entitled to the amount for liquidated damages
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – DEFECTS AND NEGLIGENCE – LIABILITY – whether the air conditioning system being installed by the plaintiff prior to the notices in August and September 2016 was defective because it did not meet the performance requirements of the contract, or alternatively, of the mechanical services specification and the mechanical services preliminary design drawings
CONTRACTS – AUSTRALIA – BUILDING AND CONSTRUCTION CONTRACTS IN AUSTRALIA – DEFECTS AND NEGLIGENCE – LIABILITY – where the defendant claims the cost to rectify non-mechanical related defects and defects which have been identified in relation to the mechanical services system – whether the works are defective works – whether the defendant is entitled to recover any costs incurred to rectify the defective works
Civil Proceedings Act 2011 (Qld), s 58
Queensland Building and Construction Commission Act 1991 (Qld), s 67PAustralian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (1996) 12 BCL 317, cited
Byrnes v Kendle [2011] HCA 26; (2011) 243 CLR 253, cited
Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85, considered
CMA Assets Pty Ltd Formerly Known as CMA Contracting Pty Ltd v John Holland Pty Ltd (No 6) [2015] WASC 217, cited
Codelfa Construction Pty Ltd v State Rail Authority (NSW) [1982] HCA 24; (1982) 149 CLR 337, followed
Equuscorp Pty Ltd v Glengallan Investments Pty Ltd [2004] HCA 55; (2004) 218 CLR 471, followed
Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; (2015) 256 CLR 104, considered
Opat Decorating Service (Aust) Pty Ltd v Hansen Yuncken (SA) Pty Ltd (1994) 11 BCL 360, cited
Westpac Securities Administration Ltd v Australian Securities and Investments Commission [2021] HCA 3; (2021) 95 ALJR 149, citedCOUNSEL:
P L O’Shea QC with M Steele and B Reading for the plaintiff
T P Sullivan QC with J Mitchensen for the defendantSOLICITORS:
Clayton Utz for the plaintiff
Thomson Geer for the defendant
BACKGROUND
THE MECHANICAL SERVICES SYSTEM
Design and Construct Contract
Plaintiff’s contentions
Use of extrinsic material
Extrinsic evidence sought to be relied upon by the plaintiff
Performance requirement of the tender drawings and the Specification
Defendant’s contentions
Consideration
Construction of clause 1(u) Annexure Part O
Mechanical Direction / Variation
JOINERY DELAY
BATHROOM DESIGN VARIATION (VP32)
Alleged Direction
What was required to be built under the Contract?
Consideration
Was there a change in the work to be undertaken within the scope of clauses 36.1(a) to (e)? Was there a direction within clause 36.1(f) or does it amount to a direction to perform a variation pursuant to clause 36.1(g)?
THE SCHEDULE 3 AND 4 VARIATIONS
Schedule 3 - VP38 – “Ceilings and partition alterations in the Great Room”
Schedule 3 - VP53 – “Back of House Corridor – second path of egress”
Schedule 3 – VP59 – “Admin and luggage change layout and joinery”
Schedule 3 – VP78 – “BWIC for boom gate”
Schedule 4 – VP58 – “BOH (back of house) ceiling”
Schedule 4 – VP60 – “Bathroom light switch – off master switch”
Schedule 4 – VP64 – “Clipsal colour switchplates as per JPDC finishes schedule”
Schedule 4 – VP66 – “Desk lamp hard wired”
Schedule 4 – VP67 – “Supply and installation of power sockets and wiring for LED lighting”
Schedule 4 – VP73 – “Paint stair soffits/colour contrasting nosings”
Schedule 4 – VP76 – “Additional corridor lighting given flip of rooms”
Schedule 4 – VP114 – “Joinery – Damage to walls by separate contractors”
SCHEDULE 5 PROVISIONAL SUMS
Provisional Sum No 2 – “Joinery to Greatroom”
Provisional Sum No 6 – “Landscaping, irrigation and paving including design, supply & installation of streetscape trees, grates, kerbing and public artwork”
Provisional Sum No 8 – “Make good of the Council footpath to Wharf and Henry Streets”
PRICING OF VARIATIONS SCHEDULE 6 - PRELIMINARIES
OTHER CLAIMS BY PLAINTIFF
COUNTERCLAIM – ALLEGED NON-MECHANICAL DEFECTS
Defect Item One – “Crack in the basement level 2 slab”
Defect Item Two – “The electrical penetration running through the mechanical services slab needs to be adequately sealed and protected”
Defect Item Three – “The storm water pipes, and each penetration through which they run, need to be adequately sealed and waterproofed”
Defect Item Four – “The concrete structure around the basement staircase and communications hub wall needs to be adequately waterproofed”
COUNTERCLAIM – ALLEGED MECHANICAL SERVICES SYSTEM DEFECTS
Defect 1.1 – “Duct bends & detail design”
Defect 2.1 – “Air conditioning – simultaneous heating and cooling”
Defect 2.2 – “Air conditioner – air commissioning”
Defect 2.3 – “Substation air intake”
Defect 2.4 – “Office – carpark ventilation noise”
Defect 4.2 – “Guest room & maids room exhausts”
Defect 4.3 – “Level 1 to 12 outside air supply”
Defect 4.4 – “Guest room toilet exhaust risers – fire rating”
Defect 4.5 – “Guest room fan coil unit – interface with occupancy controls”
Defect 4.6 – “Guest floor lift lobbies – moisture damage to ceilings and dripping air conditioning grills”
Defect 5.1 – “HX-1, HX-2 filter installation”
Defect 5.2 – “Roof mounted duct work – water pooling”
Defect 5.3 – “Insulation on roof duct work”
Defect 5.4 – “HX-1, HX-2 condensation traps omitted”
Defect 5.5 – “Water in HX-1 isolating switch”
Defect 5.6 – “HX-1, HX-2 filter gauges defective”
Defect 5.7 – “HX-2 – water pooling in outside air duct”
Defect 6.1 – “As installed drawings (O&M manuals)”
Defect 6.2 – “O&M manual content”
DEFENDANT’S CLAIM FOR ADDITIONAL LIQUIDATED DAMAGES
INTEREST
NEXT STEPS
ANNEXURE A – MECHANICAL VARIATION, COSTS, DELAY, EXTENSION OF TIME AND LIQUIDATED DAMAGES
Plaintiff’s claim for costs of carrying out the Mechanical Variation
Costs of the variation
Credit – contract works not required or incorporated due to Mechanical Variation
Additional works – three-pipe mechanical system
Demolition
Reinstatement works
Ceilings and partitions reinstatement
Tiling reinstatement
Electrical reinstatement
Fire ratings reinstatement
Hydraulics reinstatement
BWIC
Item 128 – “Core holes – 200mm through to 210mm post tension slab"
Item 127 – “Core holes – 200mm through to 700mm post tension slab”
Item 132 – “Road closure for craneage”
Item 129 – “Craneage to lift plant to roof”
Item 130 – “Mobilisation and de-mobilisation”
Item 131 – “Traffic control during crane days”
Item 126 – “X-ray scanning core holes”
Summary
Delay and the Mechanical Variation
Is the plaintiff entitled to an extension of time due to the Mechanical Variation?
Delay analysis methodology
Reasonable steps to mitigate delay
Contribution to cause of delay
Christmas shutdown
Claim for EOT
Delay Damages
Liquidated damages
BACKGROUND
On 29 April 2015, the plaintiff (Built) and the defendant (Pro-Invest) entered into a contract for the design and construction of a hotel located at 168-184 Wharf Street, Spring Hill (Spring Hill Hotel) for the sum of $33,366,027.00 (plus GST) (Contract).[1]
[1]BUI.001.001.61820.
The Spring Hill Hotel includes guest rooms over 12 levels, food and beverage facilities, front of house facilities, back of house facilities, two basement level carparks and a guest gymnasium located on level one.
The plaintiff commenced proceedings claiming the sum of $6,158,864.22. The defendant brought a counterclaim in respect of alleged defects, additional liquidated damages and alleged lost wages.
The proceedings include a number of issues which are in dispute between the parties including the entitlement to variations, costs of alleged variations, extensions of time and delay damages, the defendant’s entitlement to liquidated damages for late completion and also amounts in respect of rectification of alleged defective work.
The issues in dispute have been described under the following general headings:
(a)the mechanical services system;
(b)alleged joinery delay;
(c)liquidated damages;
(d)alleged bathroom design variation;
(e)the Schedule 3 and 4 variations;
(f)the Schedule 5 provisional sums;
(g)pricing of previously certified variations;
(h)alleged non-mechanical defects;
(i)alleged mechanical services system defects;
(j)wrongful set-off, deductions and withholding of payments;
(k)the defendant’s claim for additional damages; and
(l)interest.
Depending on the findings in respect of certain issues in dispute, some of the issues identified may not need to be determined. However, due to the nature of the proceedings, these issues will be addressed, to some degree, at this initial stage and relevant findings made.
The parties have also prepared a list of the issues of law in dispute between the parties to this proceeding. This has been broken down into liability and quantum. These issues will be considered under the headings identified above.
THE MECHANICAL SERVICES SYSTEM
The most significant issue in dispute between the parties is in relation to the air conditioning system to be installed at the Spring Hill Hotel. The plaintiff contends that by notices given in August and September 2016 there was a variation to the air conditioning system required to be installed under the Contract (Mechanical Variation). The defendant disputes this and contends that the notices required that the plaintiff comply with its obligations under the Contract and install an air conditioning system in accordance with the contractual requirements.
The parties have agreed that the following facts and issues are not in contention in respect of the alleged Mechanical Variation:
“1. In respect of the alleged Mechanical Variation:
(a)that the Mechanical Direction (consisting of written notices given on 11 August 2016, 16 August 2016 and 17 September 2016 (together or individually)) was given to the plaintiff [SOC [6]; Def [7]];
(b)that the plaintiff performed the additional works required by the Mechanical Direction [SOC [8]; Def [9]].”
In respect of the substantial issues of law in dispute between the parties in relation to the Mechanical Variation, the parties have agreed the following:
“1. In respect of the alleged Mechanical Variation:
(a)whether, on a proper construction of the Contract, the plaintiff was required to design and install an air-conditioning system allowing mode control in each room [SOC [7]; Def [8]; R [7];
(b)whether the air-conditioning system being installed by the plaintiff prior to the Mechanical Direction (consisting of written notices given on 11 August 2016, 16 August 2016 and 17 September 2016 (together or individually)) was defective because it did not meet performance requirements [SOC [7]; Def [8(a)(ii)]; R [7](ab)]]:
(i) of the Contracts; or alternatively
(ii) of the Mechanical Services Specification and the Mechanical Services Preliminary Design Drawings;
(c)whether, on a proper construction of the Contract, the Mechanical Direction:
(i)was a direction to the plaintiff to undertake a variation in respect of the mechanical works, within the meaning of clause 1 and clause 36 of the Contract [SOC [7]; Def [8]; R [7]]; or instead
(ii)constituted a notice of defective work pursuant to clause 29.3 or alternatively directions under clause 8.1 of the Contract [Def [7]-[8]; R [6]-[7]].”
The starting point is to consider the terms of the Contract.
Design and Construct Contract
The parties entered into a Formal Instrument of Agreement on or about 29 April 2015.
Clause 2 states:
“2. PERFORMANCE
(a)The Contractor shall carry out the Works in accordance with the Contract.
(b)The Principal shall pay the Contractor the contract sum at the times and in the manner provided for in the Contract.
(c)Each of the parties shall perform the obligations imposed on it by the Contract.”
Further, clause 3 provides:
“3. CONTRACT DOCUMENTS
The Contract comprises the Contract Documents.”
Pursuant to clause 1, the defined terms in the Formal Instrument of Agreement have the same meaning as in clause 1 of the General Conditions.
Clause 4 states:
“4. ENTIRE CONTRACT
(a)The Contract Documents constitute the entire agreement between the parties in respect of the Works and the Contract supersedes all previous agreements.
(b)The Contract may be varied only by written instrument executed by both parties.”
Schedule 1 outlines the documents which constitute the “Contract Documents”. The documents include the Formal Instrument of Agreement, the General Conditions and Annexures Part A to P. Relevantly to the current issue, Annexure Part K includes the preliminary design, Annexure Part L outlines the principal’s project requirements, Annexure Part O contains clarifications and Annexure Part P contains provisional sums.
The General Conditions are the Australian Standard General Conditions of Contract for Design and Construct (as Amended) AS4902-2000 (Incorporating Amendment No. 1).
Clause 1 of the General Conditions contains definitions where the words and phrases have that meaning unless the context requires otherwise.
The defined terms include as follows:
(a)Contractor’s design obligations means:
“all tasks necessary to design and specify the Works required by the Contract, including preparation of the design documents and, if the Principal’s project requirements include a preliminary design, developing the preliminary design.”
(b)Preliminary design means:
“the documents stated in Annexure Part K.”
(c)Principal’s project requirements means:
“the Principal’s written requirements for the Works described in the documents stated in Annexure Part L which:
(a) shall include the purpose;
(b) may include the Principal’s design, timing and cost objectives for the Works; and
(c) shall include a preliminary design.”
(d)WUC (from ‘Work under the Contract’) means:
“the work which the Contractor is or may be required to carry out and complete under the Contract and includes variations, remedial work, construction plant and temporary works.”
Clause 2 sets out the Nature of Contract and provides as follows:
“2.1 Performance and payment
The Contractor shall carry out and complete WUC in accordance with the Contract and directions authorised by the Contract.
Subject to the express provisions of the Contract and the performance by the Contractor of its obligations pursuant to the Contract, the Principal shall pay the Contractor the contract sum adjusted by any additions or deductions made pursuant to the Contract.
2.2 Contractor’s warranties
Without limiting the generality of subclause 2.1, the Contractor warrants to the Principal that:
(a) the Contractor:
(i) at all times shall be suitably qualified and experienced, and shall exercise due skill, care and diligence in the carrying out and completion of WUC;
(ii) has examined any preliminary design included in the Principal’s project requirements and that such preliminary design is suitable, appropriate and adequate for the purpose stated in the Principal’s project requirements;
(iii) shall carry out and complete the Contractor’s design obligations to accord with the Principal’s project requirements and, if subclause 9.4 applies, accept the novation and retain the Principal’s consultants for any work the subject of a prior contract with the Principal; and
(iv) shall carry out and complete WUC in accordance with the design documents so that the Works, when completed, shall:
(A)be fit for their stated purpose; and
(B)comply with all the requirements of the Contract; and
(b)subject to clause 9, the consultants identified in the Contractor’s tender are suitably qualified and experienced.
…
2.6 Performance specifications
Where the Principal’s project requirements include performance specifications:
(a)the Contractor shall ensure that the performance specifications are satisfied when:
(i) completing the design, specification, documentation and construction of the Works; and
(ii) making any selection of any materials, goods, plant or equipment for inclusion into the Works; and
(b)the Contractor shall ensure that:
(i) its obligations under this clause are carried out in accordance with the standard expected of a contractor competent in designing and constructing works of the kind the subject of the performance specification; and
(ii) the works and materials the subject of the performance specification are fit for the purpose.”
…
2.10 Clarifications
The parties agree that the clarifications apply to the Works or the contract sum.”
Clause 8 deals with the Contract documents and includes as follows:
“8.1 Discrepancies
When construing the Contract Documents the following rules of construction apply:
(a)in the event of any inconsistency between the Contract Documents:
(i) the formal instrument of agreement and these general conditions have precedence; and
(ii) the clarifications have precedence over the preliminary design;
(b)despite the previous subclause 8.1(a):
(i) where inconsistent levels of quality are required, the higher level of quality shall apply;
(ii) figured dimensions shall take precedence over scaled dimensions; and
(iii) drawings made to larger scales shall take precedence over drawings made to smaller scales;
(c)where the requirements of quality or any aspect of WUC is not expressly specified or depicted, the quality shall be consistent with the purpose; and
(d)drawings showing particular parts of WUC shall take precedence over drawings for more general purposes; and
(e)in all cases, the interpretation to be followed by the Contractor will be as reasonably determined by the Superintendent.
Where the Contractor considers that there is any ambiguity or discrepancy between the Contract Documents, it shall promptly advise the Superintendent in writing, who shall, subject to this subclause 8.1, give the Contractor a direction as to the interpretation to be followed.
The Contractor shall have no entitlement as a consequence of a direction given by the Superintendent under this subclause 8.1 which is consistent with the rules of construction in this clause 8.1.
…
8.4Contractor’s obligations in relation to the Principal’s project requirements
The Contractor shall:
(a)ensure that the information provided by the Superintendent defines the Principal’s project requirements in sufficient detail for the Contractor to complete the design documents;
(b)determine what additional information it needs from the Principal to clarify the Principal’s project requirements; and
(c)make requests in writing to the Superintendent to provide that information and include with those requests whatever information the Principal may reasonably require in order to make a decision.
If in the Superintendent’s opinion the information sought by the Contractor under this subclause is reasonably necessary to clarify the Principal’s project requirements, the Superintendent may refer the request to the Principal and obtain a response to such request.
Neither the Superintendent nor the Principal shall be bound by any information provided to the Contractor in relation to the Principal’s project requirements unless it is in writing and signed by the Superintendent and expressly provides that the information forms part of the Principal’s project requirements.
8.5Contractor’s design obligations
The Contractor shall as part of the Contractor’s design obligations:
(a)ensure that the design documents (including any design documents which were not produced by the Contractor or are Principal’s materials) satisfy the Principal’s project requirements;
(b)ensure that the design documents contain sufficient detail to construct the Works so that the Works, when completed, satisfy the warranties in subclause 2.2;
(c)ensure that the details contained in any design documents are co-ordinated with the details contained in all other design documents;
(d)ensure that any approval that needs to be obtained, can be obtained from the relevant authority in relation to the design documents;
(e)allow the Superintendent, the Principal or any person nominated by the Principal access to partially completed design documents at any time;
(f)keep the Superintendent informed of the progress of the design documents;
(g)conduct sufficient investigations to ascertain the existence and extent of any latent conditions which may have an effect on the Works.”
Clauses 29.3 and 29.4 deal with Defective work and provide as follows:
“29.3 Defective work
If the Superintendent becomes aware of work done (including material provided) by the Contractor which does not comply with the Contract, the Superintendent shall as soon as practicable give the Contractor written details thereof. If the subject work has not been rectified, the Superintendent may direct the Contractor to do any one or more of the following (including times for commencement and completion):
(a) remove the material from the site;
(b) demolish the work;
(c) redesign, reconstruct, replace or correct the work; and
(d) not deliver it to the site.
If:
(a) the Contractor fails to comply with such a direction; and
(b)that failure has not been made good within 5 days after the Contractor receives written notice from the Superintendent that the Principal intends to have the subject work rectified by others,
the Principal may have that work so rectified and the Superintendent shall certify the cost incurred as moneys due from the Contractor to the Principal.
29.4 Acceptance of defective work
Instead of a direction pursuant to subclause 29.3, the Superintendent may direct the Contactor that the Principal elects to accept the subject work, whereupon there shall be a deemed variation.”
In addition to the entire contract clause in the Formal Instrument of Agreement, clause 44.5 of the General Conditions provides:
“44.5 Entire understanding
The Contract:
(a)is the entire agreement and understanding between the parties on everything connected with the subject matter of the Contract; and
(b)supersedes any prior agreement or understanding on anything connected with that subject matter.
Each party has entered into the Contract without relying on any representation by any other party or any person purporting to represent that party.”
Annexure Part L sets out the Principal’s project requirements as follows:
“Principal’s project requirements
(Clause 1)
The Principal’s project requirements:
1. include the purpose;
2. include the preliminary design;
3. include:
(a) all work necessary for the development of the preliminary design;
(b)all work necessary to comply with legislative requirements;
(c)all work necessary for the design and construction of the Works;
(d)all work to be completed pursuant to the Contract.
4.are:
(a) the Contractor shall carry out and install all incidental services and works to achieve practical completion in accordance with the Contract whether or not those incidental services are specifically identified in the Contract; and
(b) to the extent qualified within Annexure Part O, the Contractor is responsible pursuant to Annexure Part J to negotiate as required with all authorities having jurisdiction over WUC to obtain at the Contractor’s cost all necessary permits, consents, approvals, certificates and the like from authorities that have not already been obtained by the Principal prior to the date of the Contract in order to complete the whole of the Works by the date for practical completion.”
Annexure Part O sets out the clarifications and includes:
“1. WUC includes:
…
(u)The Contractor’s alternative proposal for structural and mechanical systems on the basis that the Contractor meets the performance requirement of the tender drawings and specifications.
…
(ag) Refer VE items listed below:
(i) Mechanical Services: The Contractor, in conjunction with its preferred subcontractors has reviewed the documented design criteria and has offered an alternative air conditioning system based on VRF type arrangement. The system operates on a variable power supply and without the need for standalone controls and variable speed drives. Additionally, the proposal also adopts a revised pipe and duct configuration. …”
The preliminary design documents include the Mechanical Services Specification reference 3235 dated October 2014 prepared by Thwaite Consulting Group (Specification).[2]
[2]BUI.001.002.34972.
The Specification contains a number of relevant provisions including:
“1.2.2 SPECIFICATION OBJECTIVES
·The intent of this Specification and the associated documents is:
I. To provide a basis for competitive tendering
II. To allow competent Contractors to price the works
III. To provide documentation to demonstrate to the Client the scope and quality of the project
IV. To define the expectations upon the installer, by the Consulting Engineer
…
1.2.3 OBLIGATIONS OF THE MECHANICAL CONTRACTOR
·In writing this Specification the Client expects and relies upon the tenderers’ possessing specialist trade expertise necessary to complete the works in accordance with the documentation
·To raise in good time, issues requiring design input or clarification from the Consulting Engineer, particularly in respect to:
I. interpretation of the Specification or drawings
II. problems in complying with the Specification
III. omissions from the tender documents
IV. suggested alternatives/substitutions
·To provide fully co-ordinated mechanical services shop drawings with adequate provision for access and maintenance
·To certify compliance with Contract documents, including all variation instructions, at Practical Completion as required by this Specification
…
[29]1.3 MECHANICAL CONTRACTOR’S DESIGN RESPONSIBILITY
·The mechanical contractor shall be responsible for ensuring that the detailed design which they undertake is fully co-ordinated and compatible with the remainder of the project design
·The mechanical contractor’s design obligation shall include all:
I. Heat load calculations
II. Equipment selections
III. Duct work and pipe work distribution system design …”
Clause 2 of the Specification identifies the scope of work as follows:
“2.1 SCOPE OF WORK
2.1.1 GENERAL SCOPE OF WORK
·The general scope of work of the mechanical services shall comprise:
1. Detailed thermal and/or capacity calculations as required to size all plant and equipment
2. Detailed design and documentation of the mechanical services layout
…
5. Preparation of work shop drawings for review prior to ordering or commencing fabrication of plant and duct work systems
6. Supply and installation of complete and operating mechanical systems and associated controls and electrical works
…
2.1.2 SPECIFIC SCOPE OF WORK
·The specific scope of work of the mechanical services shall comprise the following:
1. Central air-cooled chilled water and heating hot water system serving the building
2. Air conditioning to guest room corridors L1-12
3. Air conditioning to guest rooms L1-12
4. Air conditioning to gym L1
5. Air conditioning to FOH areas GF
6. Air conditioning to BOH areas GF
7. Air conditioning to meeting rooms GF
…
22. All associated controls works and BMCS to provide complete and operating mechanical systems
…
2.1.3 DESIGN CALCULATIONS
·The mechanical contractor shall provide all necessary heat load calculations, ventilation rate calculations, system operating pressures calculation, duct sizing and pipe sizing calculation etc. to support the selection of all plant and equipment used in the installation
·The calculations shall be presented to the consultant who will check that they meet specification requirements. The mechanical contractor shall ensure that they are technically correct and in accordance with their or an appropriate quality assurance system.
2.1.4 PREPARATION OF DOCUMENTATION
·The mechanical contractor shall prepare workshop drawings of their design layouts
·All workshop drawings shall be submitted in accordance with program requirements for the approval of the Superintendent prior to installation. Approval, as appropriate, shall be granted by the Superintendent in principal only, such approval does not relieve the Contractor of their responsibility to comply with the requirements and intent of the specification and drawings.
…
·Provide details of all proposed equipment, including but not limited to equipment schedules and technical data, method of support, platforms.
…
2.1.7 SAMPLES, PROTOTYPES AND APPROVED EQUIPMENT
·Samples of materials and items required to be approved shall be delivered to site a minimum of 10 working days prior to approval being required. Sample fittings and accessories are required to be approved include but are not limited to:
1. Air diffusion equipment
2. Thermostats and sensors
3. Duct manufacturing method
·A schedule of approved equipment manufacturers is detailed below. The contract is deemed to include equipment of this standard or ‘approved equal’ as approved by the Consultant.
VRV plant
Air-cooled chiller
Fans – centrifugal
Fans – axial
Air filters
Dampers
Air Diffusion equipment
Mitsubishi Electric, Daikin
Aermec, Carrier
Fantech, Richardson, Phoenix
Fantech, Ziehl-Abegg
Airpure, Email, and Camfil Farr
Holyoake, Blendair
Holyoake, Air Grilles
Section 2.2 outlines the Mechanical Systems Description.
Section 2.2.1 deals with the “central air-cooled heat recovery chiller CH-1, CH-2 CHW/HHW” and states as follows:
“The entire hotel (excluding specialist areas which have stand-alone DX air conditioning systems) shall be provided with chilled water and heating hot water from a common air-cooled 4 pipe chiller (heat recovery type) located on the roof …”
Clause 2.2.3 deals with the “guest room air conditioning FCU’s”. “FCU” refers to Fan Coil Unit. This includes the following:
“2.2.3 GUEST ROOM AIR CONDITIONING FCU’S
·Each guest room shall be individually air conditioned by ceiling mounted FCU’s which supply conditioned air to the room served via acoustically insulated sheet metal duct work (discharge and suction sides) connecting to a wall mounted linear grille
…
·Provide electronic controls with a wall mounted temperature sensor/switching/adjustment to control the FCU and interface with the guest room energy management system provided as part of the electrical trades work.”
Clause 3 of the Specification deals with the design criteria.
Clause 3.1 states as follows:
“3.1 DESIGN CRITERIA
·Design criteria presented herein form the basis for the design of the works and for any alternative proposals submitted.
Item
Design Criteria
External ambient conditions (for air conditioning plant full load performance)
Summer
33.1℃ dry bulb maximum
24.8℃ wet bulb maximum
Winter
6.0℃ dry bulb maximum
Internal conditions (for conditioning plant full load performance) general
Summer
23℃ dry bulb maximum at point of control
Winter
21.5℃ dry bulb at the point of control
Controls tolerance for air conditioning system
+/-2.0℃ dry bulb at point of control (+/- 1.0℃ dead band)
Outside Air
In accordance with AS 1668.2 2013 requirements
Exhaust Air
In accordance with AS 1668.2 2013 requirements
Occupancy
Refer Table A.
Hours of operation
Continuous
Table A. Internal Loads
Area
People
Outside Air
Lighting
Density
W/m²
Power Density W/m²
Equip.
KW
Gym
8
10L/s/p
15
15
Guest rooms
2
25L/s/room
15
5
-
General office areas
1/10m2
10L/s/p
15
10
-
FOH lounge
1/3m2
10L/s/p
15
10
-
FOH lobbies areas
1/3.5m2
10L/s/p
15
10
-
Building Construction Details
Refer to architectural drawings.
Maximum External Noise Levels
To meet the Local Authority requirements nominated in the Development Application conditions and Wilkinson Murray Acoustic Report
Maximum Vibration Levels
Tactile structure vibration levels due to plant not to exceed the lower end of the range specified in AS 2670.2.
Equipment Balancing
AS 2625 for rotating and reciprocating machines
…
3.4 ACCEPTANCE CRITERIA
·Acceptance of Practical Completion and of Final Completion will require at least the following:
(a) Compliance Certification to the requirements of Statutory Authorities.
(b) Signed off commissioning schedules to confirm that systems operate in a stable and automatic manner under all conditions of full and partial load – full commissioning data and operating and maintenance manuals.
(c) Certification that capacities and efficiencies of equipment and systems satisfy specified requirements where specifically nominated to do so in the Specification.”
Relevantly, clause 9.8.2 deals with “CHW/HHW fan coil units guest rooms” and outlines certain mandatory items and control functions to be provided for each FCU system which includes:
“(b) Start Stop Control and Indication
- Wall mounted combined FCU controller with ON-OFF switch
- Interface with guest room energy management system provided by the electrical trade
(c) Temperature Control
- Space temperature sensor integral to ON-OFF switch
- Chilled water and heating hot water control valve modulation to satisfy cooling and heating load
- Each fan coil unit (and associated fans as applicable) shall be started individually according to a pre-set schedule of daily operation ...”
Plaintiff’s contentions
The plaintiff contends that on the proper construction of the Contract, the mechanical works, including the air conditioning and heating system, did not require the mechanical system installed by the plaintiff to provide for “mode control” (as opposed to temperature control) in each individual room. As a result, the defendant’s requirement notified in correspondence dated 11 August 2016, 16 August 2016 and 17 September 2016 (individually or together, the “Mechanical Direction”) that the mechanical system then being installed be changed was a direction to undertake a variation within the meaning of clauses 1 and 36 of the Contract, being the Mechanical Variation.
There is no dispute that the plaintiff performed the work required (subject to the defects which are alleged by the defendant).
The plaintiff also contends that the Mechanical Variation caused a delay to the date for practical completion of 117 days.
Overall, in respect of the Mechanical Variation, the plaintiff contends that the defendant is liable to the plaintiff in the amount of $2,076,392.25 (plus GST), being $1,074,577.25 (plus GST) for the WUC and $1,001,815 (plus GST) for delay damages.
The first step in the plaintiff’s case is to consider what the Contract required the plaintiff to build and install by way of the mechanical system. The plaintiff refers to clause 1(u) of Annexure Part O and also clause 1(ag) of Annexure Part O.
The plaintiff contends that these two clauses are insufficient to identify the alternative proposal and as the plaintiff had an obligation to install the alternative proposal (on a certain basis), the first step is to identify that proposal.
The plaintiff concludes that:
“It is necessary, and entirely orthodox, to have regard to extrinsic evidence to answer [the question ‘what was that alternative proposal?’]. After examining the legal principles, the evidence is analysed, and the alternative proposal is identified as a two pipe VRF heat pump system.”
To reach this conclusion, the plaintiff in its closing submissions, undertakes the exercise of examining case law in relation to the use of extrinsic evidence identifying the subject matter of a contract, consideration of the relevant clauses in the Contract and also extrinsic evidence relevant to the alternative proposal consisting of a number of documents and emails exchanged as part of the precontractual negotiations leading up to the Contract being entered into.
It is necessary to consider each of these steps in turn.
Use of extrinsic material
The plaintiff acknowledges that on the settled authorities in respect of the objective theory of contract, the following principles apply:
(a)The meaning of a contract is to be decided in accordance with what the terms of the contract would convey to a reasonable person in the position of the parties, rather than by reference to the subjective intentions of one, or even both, parties to the contract.
(b)In determining the meaning of the terms for a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean.
(c)Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption that the parties intended to produce a commercial result, and to avoid working “commercial inconvenience”.
(d)Determining the meaning of a written contractual term, or words used in a contract, ordinarily occurs by reference to the contract alone, being the contractual text and contextual matters.
(e)There are a number of recognised exceptions that allow reference to be made to contextual matters which are extrinsic to the language used in the contract to determine the meaning of words used in a contract.
The principal exception to the parol evidence rule is as framed by Mason J (as his Honour then was) in Codelfa Construction Pty Ltd v State Rail Authority (NSW):[3]
“The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning.”
[3](1982) 149 CLR 337 at 352.
After referring to this quote from Codelfa, the written submissions on behalf of the plaintiff go on to state:
“Another exception to the parol evidence rule referred to by Mason J in Codelfa was extrinsic evidence which assists in the identification of the subject matter of the contract. At 349, his Honour cited with approval Lord Davey in Bank of New Zealand v Simpson[4] who in turn quoted with approval the remarks of Lord Campbell in Macdonald v Longbottom[5] as follows:
‘I am of opinion that, when there is a contract for the sale or [sic] a specific subject-matter, oral evidence may be received, for the purpose of shewing what that subject-matter was, of every fact within the knowledge of the parties before and at the time of the contract.’”
[4][1900] AC 182 at 188–9.
[5](1859) 1 E & E 977 at 983, 120 ER at 1179.
It is important to note that this reference to Macdonald v Longbottom occurs in the reasons of Mason J when he is undertaking a review of the then authorities in relation to recourse to extrinsic evidence. This occurs prior to his statement at page 352 that is referred to as “the true rule”. The plaintiff’s submissions suggest that Mason J identified the circumstances in Macdonald v Longbottom as a specific exception to the parol evidence rule. Rather, a reading of the reasons of Mason J tends to support that this needs to be considered in light of the statement of principle as set out in the “true rule”.
The statement of principle of the “true rule” by Mason J continues on after the quote that has been identified in the plaintiff’s submissions. It is necessary to consider the whole of the statement of principle which continues:
“Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties’ presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.”[6]
[6]At 352.
The plaintiff’s submissions contend that the relevant principle is that “if the subject matter of a contract cannot be ascertained by reference to the terms of the contract itself, then extrinsic evidence may be referred to, and relied upon by the Court ‘to identify the meaning of a descriptive term’.”[7]
[7]Plaintiff’s written closing submissions at [26].
The plaintiff refers to a number of relevant circumstances in the current matter:
(a)The Contract does not define the words “alternative proposal”.
(b)There were no drawings or specifications with respect to the alternative proposal.
(c)The tender drawings and the Specification set out details of the mechanical system in accordance with the original tender proposal.
The plaintiff contends that the tender drawings and the Specification cannot be used to define the alternative proposal.
In relation to clause 1(u) and clause 1(ag) of Annexure Part O, the plaintiff submits:
“Clause 1(u) does nothing to describe the alternative proposal, other than to refer to the fact that the alternative proposal exists. However, this clause does say, unambiguously, that the WUC which Built was obliged to perform included the installation of the alternative proposal. It is therefore critical that the alternative proposal be accurately identified in order for the Court to know what Built’s obligation to perform the WUC was with respect to the mechanical system.”
In relation to clause 1(ag) the plaintiff also submits that whilst this does provide some assistance, it does not provide enough information to make any concluded findings as to what the alternative proposal was.
The reference in clause 1(ag) to “VRF type arrangement” assists in showing that the obligation was to build a VRF type arrangement, and not a chilled water system which was originally in the tender proposal. However, the plaintiff submits that there are at least two different types of VRF systems and a generic reference does not assist in determining which of the two different systems was to be installed.
Evidence was led at trial in relation to the two different types of VRF system, namely:
(a)A VRF heat pump system where all indoor units can either heat or cool, but not at the same time. This system requires two pipes to operate, where one pipe delivers either cooling or heating and the second pipe extracts air.
(b)A VRF heat recovery system where cooling and heating may be available to each indoor unit, independently, at the same time. This usually requires three pipes to operate, although the plaintiff recognises that Mitsubishi does manufacture a two-pipe heat recovery system. Under this system, the first pipe delivers cooling, the second pipe delivers heating and the third pipe is a return pipe.
The plaintiff submits that the other words in clause 1(ag) do little to assist the Court in identifying what was the alternative proposal other than the words “the proposal also adopts a revised pipe and duct configuration”. Whilst these words do not identify a specific pipe and duct configuration, they make it clear that the pipe and duct configuration was not to be the same as that set out for the mechanical system in the tender proposal.
The plaintiff also acknowledges that the words “has reviewed the documented design criteria and has offered an alternative air conditioning system” may also be of assistance in construing the words “performance requirement” in clause 1(u).
Ultimately, the plaintiff contends that:
“Extrinsic evidence must be admitted in order to ascertain what the alternative proposal was. That is critical to understanding Built’s obligations, including assessing Built’s claim for a variation to the mechanical system”.[8]
[8]Plaintiff’s written closing submissions at [35].
Prior to undertaking a review of the extrinsic evidence, the plaintiff also submits that when considering the extrinsic evidence it is important to “contemplate the caveat on the alternative proposal, that is, ‘… on the basis that the Contractor meets the performance requirement of the tender drawings and specification’.”
The plaintiff contends in this respect that:
“Considered objectively and leaving aside any express requirement to the contrary, the ‘performance requirement of the tender drawings and specification’ could not include a ‘performance requirement’ that the alternative proposal could never achieve, or was, in fact, not designed to achieve – imposing such a requirement would be fundamentally inconsistent with the alternative proposal being part of the agreed WUC. Accordingly, identifying the alternative proposal is a critical first step before considering what the performance requirement of the tender drawings and specification was”.[9]
[9]Plaintiff’s written closing submissions at [36].
This statement is relevant to what the plaintiff is attempting to achieve by resort to the extrinsic evidence. This will be further explored later in these reasons.
Extrinsic evidence sought to be relied upon by the plaintiff
The plaintiff seeks to rely upon the following extrinsic evidence:
(a)the invitation to tender response; and
(b)correspondence evidencing negotiations between the submission of the plaintiff’s tender on 19 January 2015 and the execution of the Contract on 29 April 2015.
The documents relied upon in relation to the tender process establish that the invitation to tender allowed, and the plaintiff submitted, a conforming tender and also an alternative tender. The tender summary identified a cost difference between the conforming tender and the alternative tender with respect to the alternative mechanical system in the amount of $786,567.00. Further, reference is made to a statement under the heading “Schedule Two – Section One – Built Design & Construct Alternate Tender Clarifications” at page 62, where it states under subheading four “Mechanical Services”:
“Built in conjunction with our preferred subcontractors have reviewed the documented design criteria and have offered an alternative Air Conditioning system based on VRF type arrangement.
The system proposed provides a more efficient solution in terms of the running costs due to the equipment operates on a variable power supply and without the need for standalone controls and variable speed drives which inherently are costly and complex to program and operate. Additionally, the proposal also adopts a revised pipe and duct configuration, thus reducing the initial cost of these components.”
The language used is reflected (largely) in clause 1(ag) of Annexure Part O and clause 1(u) of the Contract. The plaintiff submits that this is relevant as “objectively, it may be inferred that the parties intended to adopt the alternative proposal envisaged by Built’s ‘non-conforming’ tender”.
The second category of extrinsic evidence sought to be relied upon by the plaintiff is the precontractual negations from the period between when the tender response was submitted and the Contract was signed. The plaintiff identifies that there are numerous meetings, discussions and extensive correspondence between the plaintiff and the defendant, including through the defendant’s agents:
“(a) to clarify what was included in, and excluded from, Built’s tender; and
(b) to negotiate the terms of the Contract, with a focus on the final scope of the WUC and the final Contract price.”
The plaintiff also seeks to rely on information in relation to its subcontractor, Batec, continuing to develop the design and provide further details of the alternative proposal.
This evidence includes:
(a)An email on 6 March 2015 from Mr Collison of Tactical to Mr Thwaite stating “Pro Invest have agreed to proceed with a VRV system”[10] and Mr Thwaite’s response “[h]ow interesting. After all the words from holiday inn about complying with their brief”.[11]
[10]PRO.020.001.2336.
[11]PRO.020.001.2336.
(b)Email dated 30 March 2015 at 2.35pm from Mr Meredyth of the plaintiff to Mr Collison of Tactical which attached a proposed air conditioning layout and piping configuration sample “for your acceptance prior to documenting the design”. The email states that the “A/C zones will be divided into two zones to cater for different heat loads on the building façade and units will be combined vertically over a number of floors off the same condenser”. The email confirms the temperature set point will range between 22 and 24 degrees celsius and requests approval/acceptance.[12]
[12]BUI.001.002.27678.
(c)An email dated 30 March 2015 at 5.30pm from Mr Collison of Tactical to Mr Meredyth of the plaintiff,[13] which includes in the email chain as follows:
[13]BUI.001.004.23878.
(i)At 2.46pm Mr Collison forwarded Mr Meredyth’s email to Mr Thwaite asking for advice and stating that subject to that advice he would “issue appropriate instructions to Built”.
(ii)At 4.54pm, Mr Thwaite responded to Mr Collison including as follows:
“7. Are the VRV systems proposed to be heat recovery type or reverse cycle type? If the former are they 3 pipe or 2 pipe type? If the latter is the placement of FCUs proposed to be consistent with the façade they are mounted on (similar thermal zone).”
(iii)At 5.30pm, Mr Collison forwarded Mr Thwaite’s comments to Mr Meredyth and requested clarification prior to confirming acceptance.
(d)An email dated 31 March 2015 at 2.31pm from Mr Meredyth of the plaintiff to Mr Thwaite responding to the questions as follows:
“Our proposal utilises reverse cycle 2 pipe configuration. All FCU’s will be located as per original design and all condensers will be located on mechanical plant deck.”[14]
[14]BUI.100.002.6309.
(e)The same email contained a further response from Mr Meredyth stating that “[m]aximum allowable refrigerant lift for Toshiba VRF system is 80metres”.
(f)An email dated 31 March 2015 at 2.47pm from Mr Thwaite responding as follows:
“… I note your other comments and they are OK with the exception of the ground floor AC systems. The location of any condensing units at low level would be a point of great concern for the architect …The meeting proposed is to dot the iiiis [sic.] over what is the actual scope of work of the mechanical services contract which you believe that you have signed up for … The hotel operator also has particular requirements which will need to be addressed …”[15]
[15]BUI.001.004.23883.
(g)An email dated 31 March 2015 at 3.11pm from Mr Meredyth responding to Mr Thwaite’s comments as follows:
“We have not been provided with a [sic] IHG Brief other than the Tender Drawings and specification, and as such this is all we have to work with in terms of criteria (despite the conforming being a Chilled Water System which is obviously different in many ways). The offer of a conforming and alternative were provided at Tender with the Client electing to adopt the alternative at a significantly reduced price.”[16]
[16]BUI.100.002.6329.
(h)Meeting minutes dated 25 February 2015 between various personnel of Aurecon, Tactical and the defendant recorded under the heading “VRV – Chilled Water” which state as follows:
“It was agreed that VRV is the solution for HIE, subject to the system being designed with belts and braces to ensure issues such as gas leakage are covered, as well as servicing.
JR noted that VRV can and has been used successfully up to 30 stories and can be used in mixed-use however the metering issue needs to be addressed.
JR will seek to meet with IHG in Singapore next week to outline the background to the proposal to use VRV as IHG have a preference for a traditional chilled water system.
GC [Glenn Collison] noted the savings in Spring Hill were in the order of $700,000 (in mechanical and structure).
The Ibis Adelaide has a VRV system and the Ibis Brisbane will have an [sic] VRV system.”[17]
[17]PRO.020.001.0070.
(i)An email dated 9 April 2015 from Mr Meredyth of the plaintiff to Mr Collison of the defendant forwarding an email from Cushway Blackford.[18] Mr Meredyth’s covering email refers to the email from Mr Brock of Cushway Blackford and stated:
[18]BUI.001.002.27682.
“Please note that largely the IHG Standard and Thwaite design is based on Chilled Water therefore large sections of the design are not applicable hence we have not marked up the specification but rather commented separately.”
(j)The email from Mr Brock of Cushway Blackford stated:[19]
[19]BUI.001.002.27682.
“… please find attached concept sketch & supporting brief description of the proposed mech systems.
Note there is only one (1) material change from the current mechanical design, which is VRF in lieu of chilled water.
Detailed summary of current proposal (for reference):
- 2-pipe heat pump VRF systems, zoned north/south over 2 floors each (total 12x systems + ground) …”
(k)Attached to the email was also a letter from Cushway Blackford dated 9 April 2015,[20] which stated:
[20]BUI.001.002.27683.
“Air conditioning for the building is proposed to be of the Variable Refrigerant Flow (VRF) type, in lieu of chilled water systems, with condensing units located on Level 1 podium and roof (refer attached sketches).
The VRF systems will be of the 2-pipe heat-pump type, and zoned such that areas with different solar loads are served by separate plant.
The above proposal is based on our understanding of the IHG Engineering Standards (Asia Pacific) Section 9 (Holiday Inn Express Supplement), generally as follows:
- Clause 9.2.1 nominates VRF as an option for air conditioning
- Clause 9.2.3 allows the use of 2-pipe systems, with electric re-heat in temperate climates only (Brisbane is sub-tropical climate).
In general, the remainder of the current building mechanical services design (documented by Thwaite Consulting Group) will not be altered in principle.”
(l)An email dated 15 April 2015, from Mr Collison of Tactical responding to Mr Meredyth’s email of 9 April 2015 stating:
“Grant
As discussed, we have received confirmation from the Principal to proceed with the mechanical design development in accordance with information summarised in the email below…”[21]
[21]BUI.001.002.18824.
The plaintiff contends that based on this extrinsic evidence the words “alternative proposal” used in the Contract, is a reference to a two-pipe VRF heat pump system. Further, the plaintiff contends that it “is uncontroversial that this type of system [a two-pipe VRF heat pump system] cannot provide mode control to each individual guest room”.[22]
[22]Plaintiff’s written closing submissions at [79].
The submissions made by the plaintiff from paragraphs [50] to [79] of the plaintiff’s written closing submissions contain commentary based on each of the pieces of extrinsic evidence claimed to be admissible on the approach identified above.
Some of the submissions contain conclusions based on knowledge outside of what is stated on the face of the documents. For example, in paragraph [52] reference is made to the email of 6 March 2015 referring to a VRF system. Discussion then ensues as to the two different types of VRF system being the heat pump system where units can either heat or cool, but not at the same time, and heat recovery systems where cooling and heating are available independently, at the same time.
Further, at [55] in considering the email dated 30 March 2015 the inference is drawn from the reference to “A/C zones” and “two zones to cater for different heat loads on the building façade” as being a statement that “could only be a reference to a VRF heat pump system”. This seeks to infer a conclusion that the referenced words support a conclusion that the alternative proposal could not heat or cool at the same time.
At this point in the submissions, reference is also made to evidence from Mr Lord in his expert report dated 22 July 2019. This was obviously not material that was known to the parties as an independent objective fact prior to the Contract being entered into. Submissions occur in paragraphs [57] to [59] in relation to the operation of a two-pipe VRF heat pump system which is not apparent from the extrinsic material referred to above.
For example, paragraph [58] involves a discussion of how the occupants in rooms within the “zoned” areas do have temperature control under a two-pipe VRF heat pump system. An occupant is said to be able to adjust the temperature by regulating the amount of cooling received (if the system is in cooling mode) or the amount of heating received (if it is in heating mode). Further, it is identified that if the system was in cooling mode and an occupant wanted a warmer temperature, the occupant could select the temperature and the system would respond by providing ventilation, not chilled air. Thus, the temperature in the room would change as requested by the occupant. This also applies in the reverse scenario where the system is in heating mode and an occupant wants a cooler temperature.
At paragraph [60], it is expressly acknowledged that the subjective understanding of the parties is not relevant. Therefore, it does not matter whether or not Mr Collison understood that what was being proposed was a two-pipe VRF heat pump system. What is relevant is the objective position.
The submissions also refer to the piping schematic attached to the email dated 30 March 2015 as evidencing that:[23]
(a)the manufacturer would be Toshiba;
(b)it was a two-pipe system; and
(c)it did not have branch boxes.
[23]BUI.001.002.27681.
The submissions again extrapolate from this evidence that the piping schematic could “only be depicting a VRF heat pump system” because that system uses two pipes and it could not be a heat recovery system, as that system uses three pipes.
Further, at paragraph [64] of the plaintiff’s written closing submissions, reference is made, in particular, to comments from Mr Thwaite by email dated 30 March 2015 at 4.54pm containing comment number seven. The submission is phrased as being that Mr Thwaite “was clearly mindful of the fact that if the system was a heat pump VRF system it would be designed such that there would be ‘zones’ and that those ‘zones’ would need to be ‘consistent with the façade they are mounted on’.” Again, it is extrapolated that the reason for the zoning is that it is a heat pump system and simultaneous heating and cooling would not be provided to the individual indoor units.
At paragraph [70] of the submissions, the plaintiff mixes what it is seeking to rely on from the extrinsic material with the current expert evidence. The plaintiff refers to the conclusion in Mr Dowden’s report[24] that a reverse cycle system or heat pump system can only distribute heating or cooling at one time and not simultaneously to establish that “an inherent feature of a heat pump system is that it can only distribute heating or cooling at one time and not simultaneously”. This is not an objective fact established by the extrinsic material, but the plaintiff seeks to use it to bolster its case through an interpretation of the extrinsic material that it seeks to rely upon.
[24]EXP.001.001.0012.
Performance requirement of the tender drawings and the Specification
The second aspect to be considered is the phrase in clause 1(u) of Annexure Part O:
“on the basis that the Contractor meets the performance requirement of the tender drawings and specifications”.
The meaning of “performance requirement” is in dispute. It is not defined in the Contract.
It is accepted by the plaintiff that the reference to “tender drawings and specifications” is a reference to the tender drawings and the Specification.
Whilst both parties have referred to expert evidence in relation to the meaning of “performance requirement”, the plaintiff’s primary position is that the question of interpretation of the Contract is a matter for the Court and not expert evidence. That is the correct approach.
The plaintiff contends that not every aspect of the tender drawings and the Specification amounts to a performance requirement. That is, it is relevantly a subset of statements within those documents where there is a requirement for performance of the mechanical system. The plaintiff also seeks to distinguish the method by which that performance is achieved.
This consideration leads to the contention as outlined in paragraph [89] of the plaintiff’s written closing submissions as follows:
“Because Part O, clause 1(u) limits Built’s obligation to the performance requirement of the tender drawings and specification, the methods by which these systems achieve particular minimum and maximum temperatures is immaterial – what matters is whether the systems in fact achieve particular minimum and maximum temperatures because that is the performance requirement of the Thwaite specification.”
This contention is reliant upon the plaintiff’s focus on the design criteria set out in clause 3.1 of the Specification. The argument proceeds that the alternative proposal originally being installed by the plaintiff could have achieved the temperatures set out in the design criteria in clause 3.1 of the Specification and therefore the performance requirement of the Contract had been met.
The plaintiff also seeks to rely on the expert evidence in relation to the practical realities of an occupant of a room being able to control the temperature outside a designated temperature range. However, there is no articulation of the basis upon which it is contended that this extrinsic evidence can be relied upon to interpret the clause in the Contract.
This contention is expressed at paragraph [104] of the plaintiff’s written closing submissions as follows:
“In Built’s submission the ability of the air conditioning system to achieve particular temperature ranges was the relevant performance required by the Thwaite Specification … The fact that the Thwaite specification offered a different method of achieving that same performance cannot mean that the particular method adopted in that case (i.e. mode control to each individual guestroom) was the relevant performance requirement. The requirement was to achieve a particular temperature range. Guests using the alternative proposal would have … been able to achieve that range of temperatures. That a different method was to be utilised is of no relevance.”
There is a difference between the plaintiff’s written closing submissions and the oral submissions made on 13 November 2020. At paragraph [106] of the written closing submissions it states “[a] reasonable person in the position of the parties at the time of contract would not consider clause 2.2.1 (and those that follow) of the Specification to have any relevance in circumstances where the alternative proposal was not an ‘air-cooled 4 pipe chiller (heat recovery type)’”. However, at the hearing it was conceded that there may be some performance requirements contained in the Specification and drawings that were not contained in clause 3.1 Design Criteria.[25] However, this was not explored further but the concession was made and it was noted by Senior Counsel for the defendant.[26]
[25]T15-5, L27; T15-5, L42-43.
[26]T15-69, L34-37.
Further, the plaintiff contends that hotel guests in individual rooms had the ability to heat or cool their rooms and that “the alternative proposal allowed individual guests to set their thermostat so as to achieve their desired temperature within those limits, by way of obtaining conditioned air or simply ventilation”.[27]
[27]Plaintiff’s written closing submissions at [112].
The plaintiff also submits that the parties cannot have intended the Contract to mean that the requirements of virtually all parts of the Specification were performance requirements as this would in effect negative the obligation to install the alternative proposal. Further, it is contended the parties cannot have intended the Contract to mean that the alternative proposal should be installed on the basis that it meets a requirement of the Specification that the alternative proposal, of its very nature, could not meet.
Reference is made to the fact that clause 1(u) of Annexure Part O uses the singular “performance requirement”, rather than the plural “performance requirements”. While the Contract provides that words in the singular include the plural “according to the requirements of the context”, the plaintiff contends that the context here means that the use of the singular indicates the performance outcome set out in the design criteria in clause 3.1 of the Specification. The plaintiff says this is also reinforced in clause 1(ag) of Annexure Part O by the reference to “documented design criteria”.
Reliance is also placed on the introductory words to clause 3.1 of the Specification which state as follows:
“Design criteria presented herein form the basis for the design of the works and for any alternative proposals submitted”.
The plaintiff points to the absence of similar words in relation to sections 2.2 and 2.3 of the Specification as the basis for the submission that they do not have any application to an alternative proposal.
Defendant’s contentions
The defendant contends that the Contract required that the mechanical services system meet “the performance requirement of the tender drawings and specifications”. A key requirement was that the mechanical services system be capable of independently heating and cooling individual guest rooms. This meant that each guest could choose heating or cooling, independently from other guests.
The defendant’s position is that the Mechanical Direction was a notice to rectify defective work as the system being installed by the plaintiff did not perform the Independent Heating/Cooling Function.
Further, the defendant contends that whilst there was correspondence between the parties between the submission of the tender proposal (including the alternative proposal) and the Contract being executed, the Contract itself is what needs to be considered as being the agreement reached between the parties.
The defendant submits as follows:
“Rather, what the parties did was the exact opposite. They chose to insert a ‘clarification’ in the Contract that specifically allocated the risk to Built that the alternative mechanical services system would meet the performance requirement of the Tender Drawings and Specification. There are two sophisticated commercial parties entering into a $32 million Contract for the design and construction of a hotel. This is how the parties chose to deal with any risk which existed in respect of this particular issue. The basis for this agreement of course is consistent with the entire understanding clause contained in clause 44.5 of the Contract …”[28]
[28]Defendant’s written closing submissions at [25].
In respect of the approach to the proper construction of the Contract, including clause 1(u) of Annexure Part O, the defendant submits:
(a)it is not permissible to use the functionality of the alternative proposal to dictate what the performance requirement is.[29]
[29]Defendant’s written reply submissions at [7].
(b)the knowledge or understanding of the defendant in respect of the two-pipe VRF system is not relevant to the operation of clause 1(u).[30]
[30]Defendant’s written reply submissions at [10].
(c)the evidence does not support a fact objectively known by the defendant that the alternative system did not provide the Independent Heating/Cooling Function.[31]
(d)the parties could have included particulars of the alternative proposal in the Contract. However, this was not done. Clause 1(u) was inserted, together with two entire agreement clauses in the Contract.[32]
(e)clause 1(u) refers to the performance requirements of the “tender drawings and specifications”. This is a compound expression, and the phrase must be read together. The words support reading “performance requirement” in the plural.[33]
(f)every word in clause 1(u) must be given effect to “so as to preserve the bargain reached between these two commercial parties”. The plaintiff’s construction does not do this.[34]
(g)the parties intended that the performance requirements be found in both the tender drawings and the Specification.[35]
(h)this construction is consistent with clause 1(u) being a risk allocation provision. That is:
“It provides that in exchange for a $33 million contract, it is Built who assumes the risk that the mechanical services system it designs and constructs will meet the performance requirements of the tender drawings and specifications.”[36]
(i)clause 1(u) does not use the phrase “the documented design criteria” and the deliberate choice of words used tends to support a different meaning. This in turn, tends to support a construction that the performance requirements are to be found in both the tender drawings and Specification.[37]
[31]Defendant’s written reply submissions at [11]-[12].
[32]Defendant’s written reply submissions at [13].
[33]Defendant’s written reply submissions at [16]-[18].
[34]Defendant’s written reply submissions at [19].
[35]Defendant’s written reply submissions at [20].
[36]Defendant’s written reply submissions at [20].
[37]Defendant’s written reply submissions at [25].
As to the approach to the construction of clause 1(u) of the Contract, the defendant contends:
(a)it is not correct to undertake the exercise proposed by the plaintiff to identify the alternative proposal.
(b)but, even if that is done, and the alternative proposal is a “VRF two pipe heat pump system”, it is still to meet the performance requirements in the tender drawings and the Specification.[38]
[38]T14-11, L15-T14-12, L5.
Further, the defendant submits there is no ambiguity in clause 1(ag) of Annexure Part O – it says a VRF type arrangement. But even if it is assumed to be a two-pipe VRF system, the risk allocation remains in favour of the defendant.[39]
[39]T14-12, L7-26.
The defendant acknowledges that parol evidence is admissible to identify the subject matter of a written contract but this is in circumstances where the subject matter is expressed in an uncertain or ambiguous fashion. That is not the case here.[40]
[40]T15-66, L37-T15-67, L18.
In response to the plaintiff’s submission on the correct construction of the Contract, the defendant refers to and relies on MacDonald v Shinko Australia Pty Ltd.[41]
[41][1999] 2 Qd R 152 (McPherson and Davies JJA and Moynihan J).
In that case, McPherson JA stated:[42]
“It is well established that parol evidence is admissible to identify the subject matter of a written contract. A recent example, which in some ways resembles the present, is Akot Pty Ltd v. Rathmines Investments Pty Ltd [1984] 1 Qd.R. 302. But in that instance, and in the decisions discussed in it, the written contract was, as regards subject matter, expressed in an uncertain or ambiguous fashion. Here there is no uncertainty or ambiguity in the contractual identification of the subject matter. The designation in the written contract of 29 August 1995 may have been the result of a mistake; but on its face it is perfectly plain. Parol evidence of pre-contractual statements is not needed in order to identify it from the description given in the written contract.”
[42]At 154.
Further, Davies JA stated:[43]
“… the appellant submits that because of cl. 28.1 of the instrument of contract between the parties the respondent cannot refer to evidence outside the instrument to prove a prior oral contract or a continuing common intention of the parties to buy and sell a unit different from that identified in the contract in order to seek rectification of that instrument. The clause is in the following terms:
‘ENTIRE AGREEMENT
This Agreement constitutes the entire agreement of the parties as to its subject matter and supersedes and cancels all prior arrangements, understandings and negotiations in connection with it.’
The purpose of that clause, it seems to me, is to exclude any such evidence either to prove terms additional to or different from the written instrument or collateral contracts or to construe the instrument in a way different from the meaning to be inferred solely from its terms.”
[43]At 156.
As there is no uncertainty or ambiguity here, the defendant contends it is not permissible to undertake the task as proposed by the plaintiff of looking at the pre-contractual documents.
On the proper construction of the Contract, the defendant’s position is that the plaintiff was required to build a mechanical services system that satisfied the performance requirement of the Contract to provide the Independent Heating/Cooling Function. In these circumstances, the Mechanical Direction was not a variation but was a notice to rectify defective work.
Consideration
Following consideration of the relevant authorities and submissions on behalf of both parties, I have reached the conclusion that extrinsic material is not admissible to interpret the words “alternative proposal” contained in clause 1(u) of Annexure Part O of the Contract.
This conclusion is reached on the following reasoning.
The “true rule” as identified by Mason J in Codelfa Construction Pty Ltd v State Rail Authority (NSW) remains binding authority in relation to this issue.
Often reference is made to the first two sentences of “the true rule” without consideration of the discussion which immediately follows that statement. It is necessary to consider the full statement of the rule.
Further, the decision of the High Court in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[44] considered the applicable legal principles. French CJ, Nettle and Gordon JJ in joint reasons stated as follows:[45]
“The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority (NSW) and Electricity Generation Corporation v Woodside Energy Ltd.” (Footnotes omitted)
[44](2015) 256 CLR 104.
[45]At 116-7 [46]-[52].
The plaintiff is also critical of the analysis undertaken by Mr King to effectively reduce the delay of 83 calendar days[486] to zero. This includes:
(a)Using the specific activity in the 18 October 2016 program that was delayed. The activity had a late finish date and Mr King uses that date to calculate 81 calendar days of delay (from the late finish date of 8 November 2016 to 28 January 2017). Mr King provides no reason for this conclusion.
(b)That the mechanical plant should have been ordered much earlier.[487]
(c)Taking into account a Christmas shutdown of 17 days.[488]
[486]The 18 October 2016 program has a date for practical completion of 16 December 2016. If the 26 October program is adjusted for the actual date of plant procurement, the scheduled date for practical completion is 9 March 2017. The difference between the two due to the Mechanical Variation is 83 days.
[487]See separate discussion of issue.
[488]See separate discussion of issue.
If it is necessary to consider the plaintiff’s claim for an extension of time and it is necessary to consider the expert reports in respect of the analysis of the delay. I make the following findings:
(a)Consistent with my earlier findings under the Contract it is open to consider a prospective or a retrospective delay analysis.
(b)Mr King’s incremental delay analysis is to be preferred as it more closely accords with the requirements of the Contract in clauses 1, 32.2 and 34.3(c).
(c)Mr King’s analysis needs to be further considered in light of the other findings in these reasons, including in respect of the Christmas shutdown period.
Delay Damages
The plaintiff claims that the defendant is liable to the plaintiff for an amount of $1,001,815 plus GST for delay damages in respect of the Mechanical Variation. To get to the point that this claim needs to be considered, the plaintiff needs to establish that:
(a)the requirement to do the work set out in the Mechanical Direction was a variation under the Contract;
(b)the plaintiff performed the work;
(c)the variation caused a delay to the date for practical completion; and
(d)the plaintiff is entitled to an extension of time under clause 34.3 of the Contract of 117 days, as claimed by the plaintiff or another period as established on the evidence.
If I am wrong and the plaintiff is entitled to the costs of the Mechanical Variation and the extension of time, I briefly deal with the claim for delay damages.
Clause 34.9 of the Contract deals with delay damages and states as follows:
“For every day the subject of an EOT for a compensable cause, the Contractor shall be entitled to give the Superintendent a claim for delay damages reasonably and necessarily incurred by the Contractor by reason of that compensable cause. The Principal must pay the amount of the delay damages certified by the Superintendent pursuant to this subclause 34.9.
The maximum amount payable by the Principal to the Contractor for every day the subject of an EOT for a compensable cause is the actual cost incurred by the Contractor up to the maximum specified in Item 31A.
Nothing in this subclause 34.9 shall oblige the Principal to pay delay damages for:
(a) the costs of delay which have already been included in the value of a variation or any other payment under the Contract; or
(b) any qualifying cause of delay which is not a compensable cause of delay.
The amount payable by the Principal to the Contractor under this subclause 34.9 is the agreed damages payable by the Principal to the Contractor and is in full satisfaction of all claims which the Contractor may make or bring against the Principal arising in connection with all and any delay or disruption however caused or encountered by the Contractor in the execution of WUC.” (emphasis added)
Item 31A states:
“Maximum amount of delay costs (clause 34.9)
$$13,148.00 per day excluding profit and overheads”. (emphasis added)
Whilst the submissions from the parties and the expert reports consider the approach to delay damages in relevant texts and authorities, the starting point has to be the interpretation of the contractual provision.
A “compensable cause” is a defined term and includes a direction to undertake a variation. It is not established if it is a direction to rectify defective work.
The key aspects of the provision are that the plaintiff must establish the costs claimed:
(a)are actual costs incurred;
(b)are reasonable;
(c)are necessary; and
(d)by reason of the “compensable cause”.
There is a dispute between the parties in respect of the requirement for the costs to be reasonably incurred. The plaintiff says that the defendant’s pleading does not plead that the costs are not reasonable and therefore the defendant is precluded from running that as a positive case. The defendant in response says that it is squarely raised on the pleading and in any event the onus is on the plaintiff to establish reasonableness in order to come within clause 34.9.
Paragraph 27(f)(ii)(1)(a) of the Third Amended Defence and Counterclaim states:
“The Plaintiff’s claim for delay damages does not include any actual costs for time related site overheads which were reasonably and necessarily incurred by reason of the alleged Mechanical Direction”.
This pleading identifies that the defendant contends that the costs claimed did not meet the requirement of being actual costs that were reasonably and necessarily incurred. This put the plaintiff on notice that reasonableness was in issue.
Paragraph 27(f)(ii)(1)(b) of the Third Amended Defence and Counterclaim then states:
“In the premises of the matters pleaded in paragraph 27.f.ii.1.a the Defendant, pursuant to clause 34.9 of the Contract is not obliged to pay to the Plaintiff any additional delay damages for its site overheads;
Particulars
A. Section 6.2.42 to 6.2.46 of the Expert Report of David Hardiman dated 5 April 2019.”
The plaintiff contends that the Hardiman Report identified in the particulars only addresses “actually” and “necessarily” and does not refer to “reasonably”.
The defendant’s pleading may operate to preclude it from being able to run a positive case that the costs were not reasonable. But by the pleading in paragraph 27(f)(ii)(i)(a) the plaintiff is put to proof of reasonableness. This is also a requirement of clause 34.9 in any event and the onus is on the plaintiff to establish that the requirement of reasonableness is met.
The pleaded defence and the plaintiff’s claim itself are consistent with the plaintiff being put to proof of the reasonableness of the costs claimed. This is what the defendant does.
There is also a dispute between the parties as to how Item 31A operates. It stipulates the maximum amount of delay damages. That is the actual costs incurred can be claimed up to that maximum amount (subject to the other requirements being met).
Item 31A states the maximum figure as “$13,148.00 per day excluding profit and overheads”. It is not contentious between the parties that the reference to “overheads” in Item 31A is a reference to offsite overheads.
What is contentious is whether the provision excludes profit and offsite overheads from being recoverable at all (as contended for by the defendant) or whether the maximum cap does not include profit and offsite overheads, and they are recoverable and are in addition to the maximum cap (as contended for by the plaintiff).
The plaintiff submits that the words “excluding profit and overheads” must be given some work to do. Objectively read, it is submitted that the words mean that the parties did not intend for profit and overheads to be included within the “maximum specified in Item 31A”. That is, these words do not limit the recoverability of profit and overheads and simply results in profit and overheads not being constrained by the maximum.
The defendant contends that clause 34.9 and Item 31A read together exclude the recovery of offsite overheads. The defendant submits that in the context of delay damages, profit and overheads are not generally considered to be types of costs which are claimable. But this does not focus on the language of the section but rather on general principles.
The defendant further submits that profit and overheads are in the same category. Profit is not an “actual cost” and offsite overheads are not costs which are “necessarily incurred” by reason of any particular delay to a particular project (unless they are dedicated offsite overheads). The difficulty with this submission is that it is applying the words in the first paragraph of clause 34.9, rather than giving any work to the words in Item 31A.
I find that the correct construction of clause 31A is that contended for by the plaintiff, namely that profits and overheads are not included within the “maximum specified in Item 31A”. It is not to be construed to make profit and overheads not recoverable pursuant to clause 34.9. However, the position contended for by the defendant may ultimately be reached in any event by the consideration of, and operation of, “reasonably” and “necessarily” in respect of particular costs claimed.
The operation of the third paragraph of clause 34.9 is also contentious between the parties. The plaintiff submits that the third paragraph is “self-explanatory” but the parties are in dispute as to whether any delay damages already included in the cost element of the alleged variation are to be deducted from any entitlement to delay damages.
Clause 34.9 relevantly states that “[n]othing in this subclause … shall oblige … to pay delay damages for … the costs of delay which have already been included in the value of a variation or any other payment under the Contract”. The provision is clearly directed at avoiding particular costs being recovered twice.
The plaintiff contends that the costs recoverable under clause 36.4(d) being the 10 per cent on account of “profit and overheads” for the variation are a different category of “profit and overheads” to what is claimed under clause 34.9.
The basis for this includes that the costs of the variation are not dependent on whether there has been any delay. The plaintiff submits that the price of a variation, including any uplift, is entirely separate from the damage caused by the delay by reason of the variation. The price of the variation is determined by the work required by the variation, not the delay period that follows. As a result, the plaintiff submits there is no automatic entitlement to recover delay costs where there is an uplift on account of overheads in the price of a variation.
Further, the plaintiff contends that whether there is a need to nevertheless deduct from any amount of delay damages the amount included under clause 36 for overheads depends on what the amount for overheads covered. That is, for example, what did the eight per cent uplift for overheads compensate the plaintiff for.
The plaintiff’s position is that the eight per cent uplift is entirely unrelated to delay damages and compensates the plaintiff for overheads “expended responding to, and managing, the variation itself”. This is in a different category to compensation to the plaintiff for the prolonged overheads it incurred as a consequence of the 117 (or other period established on the evidence) critical delay.
As the eight per cent overhead component of the variation cost is not related to the delay incurred, or even if there is a delay, the plaintiff ultimately contends there should be no deduction of the amount of overheads included in the variation cost.
The defendant contends there should be a deduction to avoid the plaintiff “double dipping”.
This issue depends on the correct construction of the words “the costs of delay” which have already been included in the value of a variation. It is clear that if an amount relates to “the costs of delay” then it should be excluded.
Clause 36.4 sets out how the “price” of a variation is to be calculated. There is a hierarchy of options with the last option (d) stating:
“reasonable rates or prices, which shall include an amount equivalent to the percentage set out in Item 32A for profit and overheads”.
That is the relevant provision applied in respect of the assessment of costs for the Mechanical Variation being considered in this matter.
Where a variation results in a “deduction” clause 36.4 specifies that the percentage in Item 32B applies “for profit but not overheads”. Items 32A and 32B state as follows:
(a)“32A Variations, the percentage for profit and overheads for additions (subclause 36.4)
10% of the cost of the work comprising the variation.”
(b)“32B Variations, the percentage for profit for deductions (subclause 36.4)
2% of the cost of the work comprising the variation”.
There is nothing in these provisions to suggest there is an automatic overlap and that the eight per cent uplift for overheads includes “costs of delay”. However, it may depend on the particular costs claimed and also what is included in the “reasonable rates and prices” as opposed to just a consideration of the uplift for overheads.
Some rates may include components which would not be recoverable. For example, clause 36.4 also provides for the price of a variation using:
“(a) prior agreement;
(b) applicable rates or prices in the Contract;”
If these are used to arrive at the price of a variation, consideration would have to be given as to whether any amount was “the costs of delay” and therefore not recoverable as part of any delay damages.
Some assistance is also provided from a consideration of other parts of clause 36 in respect of variations. Clause 36.1 sets out procedures for variations and states that the principal shall only be liable to the contractor for the price of a variation calculated in accordance with subclause 36.4. Under clause 36.1(g) before performing the variation a notice is to be given identifying “the approximate cost of the variation including a detailed breakdown calculated in accordance with subclause 36.4”.
In contrast clause 36.2 provides an alternative variation procedure where the superintendent may give the contractor notice requesting a variation proposal be submitted by the contractor. Certain information is to be provided as part of the variation proposal including:
“(b) a detailed breakdown of the price for which the Contractor would carry out the proposed variation, including any delay or disruption costs which may be incurred by the Contractor as a consequence of the proposed variation”.
Clause 36.2 then sets out various options open to the superintendent following receipt of a variation proposal. These include:
“…
(f) accept the variation proposal and give the Contractor a direction to carry out the variation on the terms contained in that proposal, in which case a valuation under subclause 36.4 shall not be made and the addition or deduction to the contract sum shall be the amount contained in the variation proposal;
(g) negotiate different terms with the Contractor upon which the proposed variation shall be carried out;
(h) give the Contractor a direction to carry out the proposed variation on the terms contained in the Contract but with a valuation to be made under subclause 36.4 …”
Clause 36.2(b) requires that delay and disruption costs be included in the variation proposal. If that variation proposal is accepted under clause 36.2(g) the price in the variation proposal becomes the price of the variation. As a result, the price of the variation would include “delay costs”. Therefore, if a claim for delay damages was also made under clause 34.9 then those “delay costs” would not be recoverable as part of the delay damages.
This is an example of how paragraph (a) of the third paragraph of clause 34.9 may operate.
The practical difficulty in the current matter is identifying with precision what is included in the price of the variation and isolating any cost of delay which is included. There is no direct evidence that there is any component which is a “cost of delay”.
The eight per cent uplift in the price of the variation is to be interpreted as onsite overheads in respect of the actual work done for the variation unless there is evidence that all or part is a “cost of delay”. In the absence of any such evidence, the eight per cent uplift in the price of the variation does not need to be deducted from any delay damages.
There are two further issues in dispute between the parties:
(a)Whether the claimed onsite overhead costs are actual costs reasonably and necessarily incurred by reason of the Mechanical Variation?
(b)Whether the claimed offsite overhead costs are actual costs reasonably and necessarily incurred by reason of the Mechanical Variation?
Firstly, dealing with the claim in relation to onsite overhead costs.
The plaintiff’s quantum expert, Mr Bell, undertook the following analysis to arrive at the amount claimed for onsite overhead costs:
(a)From the plaintiff’s job costs (being the plaintiff’s cost records for the Spring Hill Hotel) Mr Bell used the cost codes to identify costs which were an onsite overhead and time related in the period of the claimed critical delay, 4 October 2016 to 28 January 2017.
(b)Mr Bell then calculated the average daily time related cost rate from the identified onsite actual costs based on calendar days for each month in the period of critical delay.
(c)Mr Bell then applied the average daily time related onsite cost rate to the number of critical delay days claimed (117) in each of the months.
(d)In undertaking this exercise, Mr Bell arrived at the average daily time related cost rates for onsite overheads, which are less than the maximum of $13,148.00 per day.
The defendant objects to this approach on a number of bases, including:
(a)Mr Bell only analysed whether the costs recorded were time-related overhead in nature and whether it fell within the period of critical delay. He did not analyse primary documents such as invoices and time sheets to determine whether the costs were reasonably and necessarily incurred by reason of the Mechanical Variation.
(b)In respect of “reasonableness”, Mr Bell’s only evidence on this in cross-examination was “contractors seldom spend money they don’t have to”. He also confirmed this was speculation as he had not separately investigated whether the costs were reasonably incurred.[489]
(c)In respect of “necessarily incurred by reasons of the Mechanical Direction”, Mr Bell in cross-examination gave evidence that all he did was identify whether the costs were incurred during the delay period and did not go beyond that task to consider whether they were incurred in the period because of the Mechanical Variation as opposed to other work in the period.[490]
[489]T9-105, L11-22.
[490]T10-12, L4-16.
The defendant refers to overhead labour costs as an example[491] of the deficiencies in Mr Bell’s analysis. Mr Bell was questioned about the costs incurred for Mr Meredyth in his role as “Project Manager”. The total costs for Mr Meredyth for the period were included in the delay costs. Mr Bell did not examine timesheets to see if he was managing any other work in this period. While Mr Meredyth was on site during the period that arose due to the claimed critical delay from the Mechanical Variation, there is no evidence of what Mr Meredyth was doing on site, in particular whether he was involved in the Mechanical Variation or other work.[492]
[491]Overhead labour costs are a large portion of the costs claimed.
[492]T10-14, L29-T10-15, L9.
The defendant submits that identifying onsite overhead costs incurred in the delay period is not sufficient to prove an entitlement to delay damages under clause 34.9, in circumstances where:
(a)The plaintiff led no evidence that each of the onsite costs it claims would have ceased but for the claimed delay.
(b)Further, or alternatively, the plaintiff provided no explanation as to why any expenditure, after the relevant date, was solely related to work required by the Mechanical Direction.
(c)The plaintiff did not lead any evidence that the costs were reasonably incurred or necessarily incurred by reason of the Mechanical Direction.
(d)In respect of overhead labour costs there was no attempt to identify the functions undertaken during the period of delay to only claim costs necessarily incurred by reason of the delay event.
Overall, the defendant submits that the plaintiff has not addressed the causation requirement of costs necessarily incurred by reason of the compensable cause, in this case the Mechanical Variation. Merely identifying overhead costs incurred during the period of critical delay is not enough. There must be a causal connection between the compensable cause of delay and the costs incurred.
The plaintiff’s response to these criticisms includes:
(a)If it is accepted that the Mechanical Variation caused 117 days of critical delay, the Spring Hill Hotel would have achieved Practical Completion 117 days earlier, with the consequence that the plaintiff’s onsite overheads would have been demobilised 117 days earlier.
(b)It is incorrect to calculate the daily onsite overhead cost based on the costs incurred over the last 117 days of the project.
(c)It is irrelevant that it is not possible to attribute the site overheads to the particular work encompassed by the Mechanical Variation. The point is, were it not for the delay caused by the Mechanical Variation, the plaintiff would have had 117 days fewer of costs related to onsite overheads. That is, onsite costs would not otherwise have been incurred.
(d)The plaintiff doing other work at the same time does not mean that the costs arising because of the longer duration of the project are not attributable to the delay.
The difficulty with the plaintiff’s proposition is highlighted by the consideration of the onsite labour costs claimed in respect of Mr Meredyth. There is no consideration of what Mr Meredyth was doing on site during this period. He may have been doing work totally unrelated to the Mechanical Variation. He may have been doing a mixture of work and some component may have related to the Mechanical Variation. The plaintiff would only be entitled to the costs in respect of Mr Meredyth if they were reasonably and necessarily incurred by reason of the Mechanical Variation. On the evidence, it is established that he was on site during the period of critical delay. But it is not established that the costs for his labour were “by reason of the Mechanical Variation”.
On the evidence it is not possible to be satisfied that the onsite overhead costs claimed were reasonably and necessarily incurred by reason of the Mechanical Variation as required by clause 34.9. The plaintiff has not established an entitlement to the costs under clause 34.9 of the Contract. Accordingly, if it is necessary to consider the claim in respect of delay damages, this part of the plaintiff’s claim must fail.
Dealing with the claim in relation to offsite overhead costs.
The plaintiff contends that there is no reason in principle why it is not entitled to its offsite overheads.
Further, the plaintiff submits that there was no evidence that the offsite costs were costs that would have necessarily been incurred irrespective of the delay to the Spring Hill Hotel.[493] This, however, does not address the relevant contractual requirement.
[493]Plaintiff’s written closing submissions at [445].
Mr Bell’s methodology to quantify the plaintiff’s daily offsite overheads is set out in paragraph 57 of his report.[494] Mr Bell’s method included:
(a)Consideration of the plaintiff’s financial records for the financial years ending 30 June 2016 and 30 June 2017, as they span the time that the work was performed under the Contract and also the delay period.
(b)Identification of certain actual corporate expenses and revenues and then calculated a percentage of total expenses to total turnover, as representing the percentage for offsite overheads for those financial years.
(c)Calculation of an average percentage of 3.16 per cent for the period of the project.
(d)A daily rate for offsite overheads is then calculated as $2,088 per calendar day.
[494]EXP.001.001.1518.
Mr Bell’s report also contains some further comments on the approach including:
(a)The percentage is an “all up” percentage, which takes into account revenues from both contract works and variation works. Mr Bell considers that this approach is more conservative as a lesser percentage is obtained than if revenues from variation margins were deducted from the calculation. In any event, variation margins cannot be identified from the details provided.[495]
(b)The daily rate for offsite overheads was calculated using the Emden formula. Mr Bell notes that this formula is a refinement on the Hudson formula in that it utilises actual head office overheads/profit percentage. The Hudson formula uses allowances for head office overheads which the contractor included in its tender for the contract.[496]
[495]EXP.001.001.1518 at [57(b)].
[496]EXP.001.001.1518 at [57(d)].
The plaintiff claims an amount for all overheads of $1,040,106, which includes both onsite and offsite overheads. The amount claimed for onsite overheads is $794,433.00. The plaintiff’s submissions do not separately indicate the figure for offsite overheads, but logically this should be $245,673 (being the difference between the two figures).[497]
[497]Plaintiff’s written closing submissions at [473]-[475].
The defendant contends that the plaintiff’s claim for offsite overheads is flawed for the same reason that its claim for onsite overheads is flawed: that is, the plaintiff has not proved the costs were reasonably and necessarily incurred by reason of the Mechanical Variation.
The defendant identifies that Mr Bell has calculated, using the Emden formula, the average head office overhead and profit percentage that was achieved overall in the contractor’s business and then applied that to the period of delay. As acknowledged by Mr Bell in cross-examination, this is an apportionment of actual offsite overhead costs incurred by the plaintiff in running its business to the period of delay.[498]
[498]T10-24, L15-25.
The defendant submits that this claim is not for additional offsite overheads incurred by reasons of the Mechanical Variation. It is a claim for a portion of the total running costs of the plaintiff equal to the period of delay.[499]
[499]Defendant’s written closing submissions at [305].
The defendant recognises that under clause 34.9 additional head office costs may be recoverable as offsite overheads where they were incurred by reason of the variation. But costs “to run the contractor’s business that cannot be recovered by projects, due to delayed completion and hence reduction in turnover, that is, a loss of opportunity to recover” would not be recoverable.[500]
[500]Description taken from Robert Gemmell’s text “Quantification of Delay and Disruption in Construction and Engineering Projects” PRO.071.013.0006 at pp 0003-0006.
The defendant relies on clause 47(c) of the Contract as the basis for this second category of offsite overhead costs being not recoverable. Clause 47(c) states:
“The Principal shall not be liable to the Contractor for consequential or indirect loss whether arising out of or in connection with the Contract, under statute, in tort (for negligence or otherwise) or any other basis in law or equity.”
Clause 1 defines “consequential and indirect loss” as follows:
“means any loss of income, loss of revenue, loss of profit, loss of financial opportunity, loss of business or loss of business opportunity, loss of contract, loss of goodwill, loss of use, loss of production or failure to realise anticipated savings (whether the loss is direct or indirect)”.
The defendant submits that as a result of clause 47(c) the defendant is not liable for any consequential or indirect loss, which is the true character of the plaintiff’s claim for offsite overheads.
Senior Counsel for the defendant cross-examined Mr Bell in respect of this issue, including as follows:[501]
[501]T10-25, L33-45-T10-27, L12-29.
“Built’s claim for offsite overheads is for costs incurred to run its business, but these costs are not costs directly chargeable to this project?---That’s – that’s a fair assessment, yes.
Do you agree that in the abstract some offsite overheads may be dedicated overheads, that is, head office overheads dedicated to supporting onsite resources in a particular project?---They could be.
But you haven’t identified any dedicated offsite overheads in this case?---No. I haven’t given any detail of what the overhead costs are comprised of.
Now, have you identified any dedicated offsite heads that increased as a result of a mechanical direction?---No.
…
I understand what you’re saying, but these are costs that would have been incurred, in any event, regardless of the project?---I don’t know that.
Well, you don’t know otherwise, do you?---No, I don’t.
And you cannot – there’s no basis, or nobody’s provided you any basis to suggest that these are dedicated offsite overhead costs?---I – I have not got any information about whether they would be described in that particular fashion in the way that Mr Gemmell does.
Okay. See, what I’m going to suggest to you is, in the absence of that evidence, you can’t say, one way or the other, anything other than that the head office had costs in running its business?---That – that’s probably a fair assumption. Yes.
And you haven’t got any basis – you don’t have any – sorry – you don’t have any basis to suggest that those costs would have been incurred in any event, regardless of the mechanical direction?---I don’t have any insight into what the basis of the incurring of those costs was.”
In light of this evidence from Mr Bell, the defendant says that the claim for offsite overheads is “properly characterised as a claim for the loss of opportunity to earn revenue from other work to support its offsite resources because it[s] onsite resources remained on site longer because of the delay”.[502]
[502]EXP.001.001.1621 at p 1691 [6.2.54]; PRO.071.013.0006 at p 0004.
This contention is supported by the evidence of Mr Hardiman that the Emden formula used by Mr Bell is an accepted method for calculating overheads for a loss of opportunity claim.[503] Such a claim is precluded by clause 47(c) of the Contract.
[503]T13-2, L45-T13-3, L3.
The defendant alternatively contends that, even if the claim was not precluded under clause 47(c), the plaintiff has not established on the evidence that it lost an opportunity to earn additional revenue to support its offsite overhead resources.
The Plaintiff maintains that Mr Bell’s calculations should be accepted by the Court, including on the basis that:
(a)The Emden formula is entirely orthodox.
(b)Mr Bell has specific expertise as a delay expert and in delay costing. Mr Hardiman has more general expertise as a quantity surveyor.
(c)The plaintiff’s claim for daily costs of overheads, both onsite and offsite, does not exceed the ‘maximum specified in Item 31A”, being $13,148.00 per day.
(d)The right to claim delay damages expressly conferred by clause 34.9 is not subject to the limitation in clause 47(c) of the Contract.[504]
(e)Authorities support the recoverability of offsite overheads without consideration of evidence establishing the loss of opportunity (along the lines of, “[b]ut for this, we would have gone out and got this other contract”).[505]
[504]T15-33, L10-18.
[505]T15-33, L34-45; Alfred McAlpine Homes North Ltd v Property and Land Contractors Ltd (1995) 76 BLR 59 at 70; J F Finnegan Ltd v Sheffield City Council (1988) 43 BLR 124 at 134-135.
Again, the difficulty in relation to this claim for offsite overheads is whether the amount claimed satisfies the contractual requirement in clause 34.9. The question must be asked in respect of the costs claimed in relation to offsite overheads: are they costs reasonably and necessarily incurred by reason of the compensable cause, being the Mechanical Variation)?
The evidence establishes that the amount claimed by the plaintiff in respect of offsite overheads is a portion of the total running costs of the plaintiff’s business for the period of the delay. There has been no attempt to find a causal connection with the Mechanical Variation. It is a purely mathematical exercise – a daily rate of offsite overheads costs has been calculated and then multiplied by the number of days in the delay period.
Equally, there has been no attempt to establish that these costs were reasonable and necessary. It is again a purely mathematical exercise – calculations have been undertaken based on categories of corporate expenses, with no evaluation of the costs incurred.
The plaintiff has the onus of establishing an entitlement to delay costs pursuant to clause 34.9. It has provided evidence in support of its claim but that evidence is not focused on the contractual requirements of clause 34.9. The Contract sets out clearly and unambiguously that the recoverable costs are costs that are reasonably and necessarily incurred “by reason of that compensable cause”. Global claims are not sufficient.
On the evidence it is not possible to be satisfied that the offsite overhead costs claimed were reasonably and necessarily incurred by reason of the Mechanical Variation as required by clause 34.9. The plaintiff has not established an entitlement to the costs under clause 34.9 of the Contract. Accordingly, if it is necessary to consider the claim in respect of delay damages, this part of the plaintiff’s claim must fail.
Liquidated damages
The last issue to be considered if the Mechanical Variation is established is the effect of any extension of time on the liquidated damages which the defendant has withheld.
If an extension of time is ultimately granted than a corresponding adjustment to the amount of liquidated damages will need to be made.
One unresolved issue remains: whether any adjustment to the liquidated damages uses the date for practical completion of 10 November 2016 or whether the “correct” date for practical completion of 27 October is used as the starting point for any adjustment as a result of an extension of time?
While the defendant’s claim for additional liquidated damages arising out of its attempt to correct the error was not allowed, it may be open, or even appropriate, to use the revised date in any adjustment of the liquidated damages by the Court.
The defendant’s claim was unsuccessful due to an inability to correct the error as there was no provision in the Contract to allow that to occur.
There is evidence as to the error in Mr King’s report[506] and also in the liquidated damages certificate issued by the Superintendent on 20 May 2019.[507]
[506]EXP.001.001.0858 at pp 0880-0883.
[507]PRO.060.001.0095 which was admitted into evidence and can be relied upon for the truth of its contents.
The definition of “date for practical completion” in clause 1 envisages the date for practical completion being adjusted as a result of litigation: “if any EOT for practical completion is … allowed in any … litigation, it means the date resulting therefrom”.
The submissions of the parties in relation to the error in the date for practical completion were directed at the defendant’s claim. It may be appropriate that further submissions be provided on this issue if an extension of time is ultimately granted and the date for practical completion needs to be identified for the purposes of working out the period for liquidated damages to be calculated.
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