Donau Pty Ltd v ASC AWD Shipbuilder Pty Ltd

[2018] NSWSC 1273

Supreme Court

New South Wales

Medium Neutral Citation:	Donau Pty Limited v ASC AWD Shipbuilder Pty Limited [2018] NSWSC 1273
Hearing dates:	16 to 18, 23 to 25 July 2018
Decision date:	20 August 2018
Before:	Ball J
Decision:	See paragraphs 179 and 180 of this judgment.
Catchwords:	CONTRACTS – Construction and interpretation – Parol evidence rule – Prior negotiations – Subsequent conduct CONTRACTS – Termination – Election – Where a party’s conduct is consistent with both an election to affirm the contract and the reservation of a right to terminate CONTRACTS – Construction – Interpretation – Implicit limitation on contractual right that right be exercised within a reasonable time CONTRACTS – Termination – Consequences of termination – Whether claim for liquidated damages released by contractual provision CONTRACTS – Misleading conduct under statute – Misleading or deceptive conduct – Opinions – Predictions – Whether the impugned conduct was misleading or deceptive – Causation and reliance
Legislation Cited:	Australian Consumer Law Local Government Act 1919 (NSW)
Cases Cited:	Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36 Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25 Canning v Temby (1905) 3 CLR 419; [1905] HCA 45 Cavallari v Premier Refrigeration Co Pty Ltd (1952) 85 CLR 20 Champtaloup v Thomas [1976] 2 NSWLR 264 Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; [1982] HCA 24 Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158 Elders Ltd v Incitec Pivot Ltd [2006] SASC 99 Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; [1993] HCA 27 Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 K & M Prodanovski Pty Ltd v Calliden Insurance Ltd [2012] NSWCA 117 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537; [1982] HCA 29 Reid v Moreland Timber Co Pty Ltd (1946) 73 CLR 1 Sargent v ASL Developments Ltd (1974) 131 CLR 634; [1974] HCA 40 Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 Tropical Traders Ltd v Goonan (1964) 111 CLR 41 United Australia Ltd v Barclays Bank Ltd [1941] AC 1 Wendt v Bruce (1931) 45 CLR 245; [1931] HCA 9 Whitworth Street Estates Ltd v Miller [1970] AC 583 WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297; (2016) 341 ALR 467
Category:	Principal judgment
Parties:	Donau Pty Limited ABN 17 000 019 616 (Plaintiff) ASC AWD Shipbuilder Pty Limited ABN 15 112 123 181 (Defendant)
Representation:	Counsel: NC Hutley SC with K Stern SC and E Bathurst (Plaintiff) PJ Brereton SC with E Holmes, R Mansted and A Bhasin (Defendant)   Solicitors: McCabe Curwood (Plaintiff) Johnson Winter & Slattery (Defendant)
File Number(s):	2016/163292
Publication restriction:	None

Judgment

Introduction

1. By an Alliance Based Target Incentive Agreement dated 3 October 2007 between the Commonwealth of Australia, the defendant, ASC AWD Shipbuilder Pty Ltd (ASC), a wholly owned subsidiary of ASC Shipbuilding Pty Ltd, and Raytheon Australia Pty Ltd (together, the AWD Alliance), ASC agreed to build for the Commonwealth at least three air warfare destroyer (AWD) ships and Raytheon agreed to design and supply the combat systems for the ships. The ships were designed by Navantia SA, a company based in Spain, under a separate contract.

2. The construction of the hull of each ship was broken into 31 parts known as “Blocks”. On 20 August 2009, ASC entered into a subcontract (the Original Contract) with the plaintiff, Donau Pty Limited, formerly known as Forgacs Engineering Pty Ltd (Forgacs), for the construction of certain Blocks in each of the three ships.

3. The Original Contract was varied on a number of occasions. On 26 October 2012, ASC and Forgacs entered into a Second Heads of Agreement (2HA) by which they agreed to vary the terms on which Forgacs would be paid for the work that it did. The question in this case is whether Forgacs is entitled to recover fees in accordance with the 2HA. That question raises a number of issues. The first is whether and, if so, when the relevant provisions of the 2HA came into effect. The second is whether, if the provisions altering the terms on which Forgacs would be remunerated did come into effect, ASC validly terminated the 2HA by notice dated 7 June 2013. The third is, if the termination was effective, what effect the 2HA had on the rights and liabilities of the parties. The fourth is whether ASC was induced to enter into the 2HA as a consequence of the misleading or deceptive conduct of Forgacs and, if so, whether ASC is entitled to recover damages calculated as the difference between the amount for which ASC is liable and the amount for which it would have been liable if it had not entered into the 2HA.

Background

4. The construction of each Block was divided into two phases. Phase 1 (PH1), sometimes referred to as “hot work”, was work that created a flame or spark. Phase 2 (PH2), sometimes referred to as “cold work”, was the balance of the work on the Block and included matters such as the installation of electrical components, heating, ventilation, cooling and insulation.

5. Under clause 7 of the Original Contract, the scope of the work to be undertaken by Forgacs was to be determined by a process by which ASC was required to issue, by the dates specified in Attachment E to the contract, “Block Work Packs” setting out the scope of work to be undertaken in respect of PH1 and PH2 of each Block covered by the contract. Within 20 working days of receiving a Block Work Pack, Forgacs was required to provide ASC with an estimate of the costs and time to complete the work, which was to be based on rates and metrics set out in the contract. If ASC accepted the estimate, it was required, within a further 20 working days of receiving the estimate, to issue Forgacs with a Purchase Order and, on the issue of the Purchase Order, Forgacs became obliged to complete the work in accordance with it. If ASC did not issue a Purchase Order within 20 working days accepting Forgacs’ estimate, it was entitled to issue a Purchase Order in respect of the relevant Block Work Pack based on its own estimate prepared in accordance with the contract and Forgacs was required to commence work in accordance with that Purchase Order. In the meantime, the contract contained provisions for the parties to negotiate in good faith to agree the terms of the Purchase Order and, failing agreement, for the terms to be determined by an independent expert.

6. Forgacs was required to deliver “Supplies” in accordance with the Purchase Order but it was not entitled to deliver any Supplies or additional Supplies without a Purchase Order or amended Purchase Order. The contract referred to the accumulated total of costs estimates contained in all Purchase Orders as the “Target Cost Estimate or TCE”. It contained a mechanism in clause 21.11 for adjusting the TCE in the event of what was defined in the Original Contract as a “TCE Adjustment Event”. “TCE Adjustment Event” included matters such as a change in the scope of the work to be undertaken and certain changes in the costs of the work.

7. The Original Contract also contained a mechanism by which Forgacs could raise queries in relation to the production of a Block through a document referred to in the contract as a “Problem Analysis Report” (PAR). Under the contract, ASC was required to review each PAR and provide a technical solution to the issue that Forgacs had raised.

8. The Original Contract did not contain any specific provisions dealing with variations resulting from design changes. However, the effect of the contract was that where design changes were made in respect of work that was already the subject of a Block Work Pack, those changes could only be incorporated through a process of issuing a revised Block Work Pack and Purchase Order in respect of the relevant work.

9. Under the terms of the Original Contract, certain material required to fulfil a Purchase Order was to be supplied by ASC. ASC stored some of that material, including steel plates, at Forgacs’ premises.

10. The Original Contract contained provisions relating to the payment of liquidated damages in the case of late delivery. In particular, clause 18.1.1 provided:

If the Contractor does not achieve an Acceptance by the relevant Acceptance Dates, ASC may, in its discretion, by notice to the Contractor at any time thereafter, impose on the Contractor a liability to pay ASC, by way of liquidated damages, a specified amount calculated in accordance with Attachment I. No amount shall be owing to ASC until ASC elects, to recover any such liquidated damages.

“Acceptance” is defined to mean “the signature, by ASC, of a Supplies Acceptance Certificate in accordance with clause 41 of this Contract”. “Acceptance Date” is defined to mean the date specified in Attachment E to the contract for Acceptance of the relevant Supplies. The contract contained a mechanism by which Forgacs was entitled to make claims for extensions of time of the Acceptance Dates in certain circumstances.

11. Forgacs was entitled to be paid for the actual work it did at the rates set out in the Original Contract (referred to in the contract as “Payable Costs”). In addition, the contract contained what is described in the industry (and in the contract) as a “Pain:Gain Regime” by which Forgacs was entitled to a “Payable Fee” of 19 per cent of Payable Costs, which would reduce (or increase) depending on Forgacs’ performance compared to the TCE. The estimated costs of completion were referred to as the “EAC”. Clause 21.10 of the contract relevantly provided:

21.10.1   If the EAC exceeds the TCE, the Payable Fee will be reduced by 50 cents in every dollar that the EAC exceeds the TCE.

21.10.2   If the EAC is lower than the TCE, the Payable Fee will be increased by 50 cents in every dollar that the EAC is under the TCE. The amount of Payable Fee to the Contractor will be a maximum of double the Contractor’s Target Fee [that is, the 19 per cent of Payable Costs].

12. The final amount payable under the regime could only be determined on completion of all the work contemplated by the contract. However, the contract provided for the calculation quarterly (originally, six monthly) of the expected fee based on actual performance to date and for the payment (or the refund) of a proportion of the fee based on that calculation and the actual work done to date. That principle was expressed in these terms in clause 21.9.1(d) of the Original Contract:

[I]f the Payable Fee exceeds the Payable Fee previously paid to [Forgacs] in the previous Fee Payment Period ASC will pay to [Forgacs] the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period. If the Payable Fee for that Fee Payment Period is less than the Payable Fee already paid to [Forgacs] by ASC, [Forgacs] will pay to ASC the difference between the Payable Fee already paid and the Payable Fee for that Fee Payment Period.

“Fee Payment Period” is defined to mean “each consecutive period of 3 months following [the Effective Date]”.

13. The amounts payable in respect of the Payable Fee were calculated using data from an Earned Value Management System (EVMS), which Forgacs was required by the contract to maintain. Various data relating to the expected and actual performance of Forgacs under the contract were entered into the EVMS and those data were provided to ASC each month together with a monthly progress report. In addition to being used to calculate the amount payable by or to ASC in respect of the Payable Fee, the data from the EVMS provided ASC with a valuable tool in assessing Forgacs’ performance under the contract and planning the allocation of resources for the project as a whole.

14. One metric produced from the EVMS that was used in measuring Forgacs’ performance was the Cost Performance Index (CPI). The CPI was the ratio of actual costs to a particular date to earned value (that is, the value of the budgeted amount of work for the job that had been completed by that date). If the actual cost equalled the budgeted cost, the CPI would be one. If the actual cost was greater than the budgeted cost, the CPI would be less than one. If it was less than the budgeted cost, it would be greater than one. Consequently, the higher the CPI, the better Forgacs’ performance. Another metric was the Schedule Performance Index (SPI), which was the ratio of earned value, which was a measure of the value of work completed expressed in terms of the budget assigned to that work, to the planned value, which was the sum of the budgets for work scheduled to be completed within a given period.

15. The Original Contract also required Forgacs to provide ASC with an unconditional and irrevocable security that had a face value of $20 million. ASC was entitled to call on that security if it determined that an amount was owing to it by Forgacs in relation to the project or ASC suffered “Loss” as a result of a “Default” by Forgacs. That security was replaced on or about 17 October 2014 by an unconditional bank guarantee for the same amount provided by Forgacs to ASC in accordance with a contract executed on 2 May 2014 and referred to as the “Offsite Block Subcontract Terms and Conditions” (NTE Contract).

16. Problems arose in implementing the Original Contract, principally because, contrary to the expectations of both parties, a large number of design changes were made by Navantia to the ships. Those changes meant that the parties were unable to comply with the processes in the Original Contract for specifying the scope of work to be undertaken by Forgacs consistently with the timeframes set out in the contract. As a result, some work was delayed and other work was undertaken otherwise than in accordance with an approved Purchase Order. Those problems were exacerbated in 2011, when, following a dispute between ASC and BAE Systems, which had also been subcontracted to construct a number of Blocks, ASC allocated some additional Blocks to Forgacs, which had the result of placing further pressure on Forgacs to complete the work allocated to it by the agreed dates.

17. In late 2011, a process was put in place between ASC and Forgacs by which, instead of issuing a new Block Work Pack in respect of each design change, ASC issued a Change Notification Request (CNR) consisting of a form requesting the required change together with the relevant drawings. Forgacs completed the form by identifying the costs of the change and any additional time that would be required to complete the changed work and returned the completed form to ASC for approval. At about the same time, the parties also abandoned the PAR process and, instead, followed a process by which ASC Field Engineers located at Forgacs’ premises worked directly with Forgacs to identify solutions to production problems. However, the Original Contract was not formally amended to reflect those revised processes, leaving both parties exposed contractually. Moreover, the cumulative effect of the various difficulties was that the EVMS became an unreliable source of information concerning the progress of the work and anticipated completion dates, which in turn made the calculation of the amount payable in respect of the Payable Fee inaccurate.

18. Conscious of those difficulties, the parties commenced discussions in late 2011 concerning options to simplify the Original Contract so that they would be able “to focus more on the project and the delivery of the Blocks rather than dealing with the contractual burden of the current process”, to use the words of Mr James Cuthill, who was the ASC employee who had project management responsibility for all of the Blocks allocated to Forgacs (among others) at the time. Those negotiations became known as “contract refresh”.

19. The negotiations were protracted. While they were continuing, the parties agreed that, from the June to August 2012 fee payment period, ASC would pay Forgacs an amount of 11.43 per cent of Payable Costs in respect of its entitlement to Payable Fees pending agreement on the terms of the amendments to the Original Contract. That percentage had been derived from the EVMS for the immediately preceding fee payment period.

20. The negotiations to vary the Original Contract culminated in the 2HA. The 2HA required approval both from the AWD Alliance board and the board of ASC. Approval was given by ASC at a board meeting on 6 September 2012 and, as I have said, the agreement was entered into on 26 October 2012.

21. Two papers were prepared for the ASC board meeting. The first, which was dated 30 August 2012, was prepared by Mr Cuthill, submitted by Mr Martin Edwards, the General Manager Current Operations of the AWD Alliance, and authorised by Mr Stephen Ludlam, the Managing Director and Chief Executive Officer of ASC. The paper identified the following reasons for the 2HA:

•  Enable cost savings in the region of $10 Million to be realised against the current Forgacs Block Subcontract Estimate at Completion (EAC);

•  Provide more direct control over Forgacs’ operations to allow ASC to drive scope completion of the blocks to the required schedule;

•  Introduce a clear focus on Forgacs’ productivity improvements to increase efficiency and reduce overall cost;

•  Provide an effective mechanism for change management with reduced administrative and commercial burden; and

•  Reduce the risk to ASC of a potential deterioration in relationship due to on-going contractual and commercial pressure over the volume of design change being introduced into the construction drawings.

The board paper also noted that:

[The] revised Fee structure is considered fair and reasonable return to Forgacs taking into account the financial and contractual risks which remain with Forgacs under the proposed Revised Contract arrangement. Should Forgacs’ performance degrade beyond acceptable tolerances ASC will now have the ability to transfer work scope to Osborne for completion, which will allow mitigation of subcontractor cost blow outs caused by inefficiency.

22. The second board paper was dated 6 September 2012. It was prepared by Mr Liam Wallace, the General Manager Business, and authorised by Mr Ludlam. The actual recommendation to approve entry into the 2HA was made in that board paper. However, that board paper did not relevantly add any additional information to the information contained in the earlier paper.

23. In view of its central role in this case, it is necessary to set out the terms of the 2HA in some detail.

24. Clause 2.1 of the 2HA provides:

Obligations From the Transition Date

The parties acknowledge and agree that the following provisions set out in this clause 2 will apply on and from the Transition Date:

(a)   Payable Fee on all Payable Costs incurred prior to the Transition Date will be paid at twelve percent (12%);

(b)   the TCE process set out in clause 7.3 of the Subcontract [that is, the Original Contract] will cease to operate and:

(i)   ASC will provide Block Work Packs that define work scope;

(ii)   Forgacs will provide a budget based on its work orders rolled up to Block Work Pack level for the issued work scope (Budget);

(iii)   as soon as reasonably practicable after receipt of the Budget ASC will provide a written work authorisation;

(iv)   Forgacs will only carry out and ASC will only be liable for work authorised by ASC by a written work authorisation;

(v)   the labour rates and ODCs set out in Attachment C of the Subcontract will continue to apply to work conducted under a work authorisation;

(vi)   all Payable Costs except Fixed Overhead will attract a margin of eight and a half percent (8.5%); and

(vii)   Fixed Overhead will attract a margin of twelve percent (12%).

paid monthly in arrears (Base Fee);

(c)   all Payable Costs except Fixed Overhead, will be subject to a performance based margin (Incentive Fee) which will:

(i)   comprise of schedule based incentives calculated in accordance with Attachment A capped at one percent (1%) of Payable Costs incurred in the preceding month;

(ii)   comprise of performance based incentives calculated in accordance with Attachment A capped at four and a half percent (4.5%) of Payable Costs incurred in the preceding three months;

(iii)   be assessed on each individual month or quarter respectively, and not on a cumulative basis; and

(iv)   be subject to review (including applicable scope and targets) three (3) months after the Transition Date and six (6) monthly thereafter.

(d)   the Depreciation Charge remains unchanged and will not be subject to any Payable Fee or other margin;

(e)   the Subcontract Liquidated Damages regime will cease to apply;

(f)   ASC personnel will be integrated into the Forgacs project management decision process through involvement in Forgacs’ internal production meetings and schedule discussions, and any amendments to Project Management structure or personnel numbers must be Approved by ASC;

(g)   the EVMS will be retained and maintained but will not determine Payable Fee;

(h)   Forgacs will store ASC steel plate relating to the AWDs at no cost;

(i)   Forgacs will be provided with an opportunity within a discrete period at its cost to assess and elect to conduct repairs to any Defect or Latent Defect arising during the Warranty Period or Latent Defect Period respectively; and

(j)   all other rights and obligations will continue in force.

25. “Transition Date” is defined to mean “the earlier of the date set out in clause 4.1(a) or the date upon which ASC Approves the Baseline True Up”. “Baseline True Up” is defined to mean “ASC’s review and Approval of the production baseline, EVMS, Configuration Status Accounting Report (CSAR) and Schedule Baseline for each Block to apply from the Transition Date”. “Schedule Baseline” is defined to mean “the schedule setting out at least the Shipping Dates for each Block that will apply from the Transition Date”. “Approval” is defined in the Original Contract to mean “the act of ASC approving a particular course of action as a basis for further work under the contract”; and “Approve” is defined to have a corresponding meaning. Those definitions are picked up by the 2HA.

26. Attachment A contains a detailed explanation of how the Incentive Fee referred to in clause 2.1(c) was to be calculated. It is common ground that it could only be calculated once Baseline True Up had been agreed and that components of it would be agreed as part of agreement on Baseline True Up.

27. Clause 4.1 of the 2HA provides:

The parties acknowledge and agree:

4.1   Baseline

(a)   to use all reasonable endeavours to complete the Baseline True Up by 14 December 2012 provided that if the Baseline True Up is not agreed by 28 February 2012 ASC may terminate this Agreement by providing written notice to that effect whereupon the parties shall have no further rights, claims or obligations with respect to the subject matter of this Agreement;

(b)   the Schedule Baseline will apply from the Transition Date and will be maintained and updated monthly by Forgacs;

(c)   upon Approval by ASC the Schedule Baseline will replace Attachment E of the Subcontract; and

(d)   all proposed amendments to the Schedule Baseline must:

(i)   be Approved by ASC prior to implementation; and

(ii)   be facilitated by SDRL PCMS submission.

(e)   Forgacs will deliver a CSAR and VARs report for each Block on a monthly basis for Approval by ASC.

…

28. The parties agree that the reference to “28 February 2012” in clause 4.1(a) is an error and that it ought to be read as a reference to 28 February 2013.

29. Clause 4.2 sets out the timeframes in which changes to scope could be made. So, for example, clause 4.2(a) provides that “ASC will not issue any new or additional work scope (including CNRs) within sixteen (16) weeks of a Block’s Shipping Date”. “Shipping Date” of a Block is defined in the Original Contract to mean “the dates set out in Column D of Attachment E, being the dates upon which the relevant supplies must be delivered to the Dock”. Again, that definition is picked up by the 2HA.

30. Clause 5.1 provides:

Negotiation & Contract Amendment Proposal (CAP)

The parties acknowledge and agree that:

(a)   as soon as reasonably practical after agreeing the Baseline True Up the parties will execute a Contract Amendment Proposal or other appropriate document as may be agreed between the parties to incorporate their agreement in relation to the matters set out in this Agreement into the Subcontract; and

(b)   a failure or delay in executing a Contract Amendment Proposal shall not invalidate or render unenforceable any provision of this Agreement.

31. Clause 6.1 contains the following release:

Subject to the terms of this Agreement, on and from the Transition Date each party releases each other party and their employees, directors, servants, agents, assigns and any related bodies corporate (as defined in the Corporations Act 2001) (Related Persons) from all costs, expenses, losses, damages and liability (including legal costs) suffered, incurred or owing by the respective parties, and their Related Persons, and all claims, actions and proceedings (whether actual, present, future or contingent), arising from, under or in connection with any Extension of Time, TCE Adjustment Event or Liquidated Damages Amount arising under the Subcontract (whether in contract, tort or otherwise) and which arise, accrue or exist before the Effective Date.

32. Clause 6.4(a) of the 2HA provides that subject to the express terms of the agreement “the respective rights and obligations of each party under the [Original Contract] and at law existing as at the Effective Date of this Agreement are expressly preserved”.

33. Clause 8.7(b) of the 2HA provides:

Any provision of this Agreement which is unenforceable or partly unenforceable is, where possible, to be severed to the extent necessary to make this Agreement enforceable, unless this would materially change the intended effect of this Agreement.

34. Following execution of the 2HA, the parties entered into negotiations to agree a Baseline True Up. That involved three components. One was the production baseline, which involved agreeing (and ASC approving) the budget for all known scope of the work already completed as well as all scope planned to be completed by Forgacs, including agreeing on the rates that Forgacs would be paid for work going forward. The second was a schedule true up, which involved setting the schedule for the work still required to be undertaken by Forgacs. Work on that could not commence properly until the production baseline was largely complete because it was not possible to determine an accurate schedule for the project without clarity over the precise scope of the work to be undertaken. The third was the CSAR, which was a list of all documents and their revisions on which the new baseline scope, budget and schedule were based. The evidence is that that could only be completed once all other aspects of the Baseline True Up were complete.

35. The budget part of the Baseline True Up was completed in March 2013. Negotiations on the schedule part of the Baseline True Up commenced in February 2013 and continued through the months of March, April and May 2013. During that time, Forgacs provided ASC with various iterations of a proposed schedule and representatives of ASC and Forgacs met on a number of occasions to discuss the schedule. There is no suggestion that the negotiations represented anything other than a genuine attempt by both parties to reach an agreement on the schedule. However, they were unable to do so. Mr Cuthill’s uncontested evidence was that the problems with the schedules included:

(a)   the schedules made assumptions that either had not, or could not, be achieved;

(b)   some iterations assumed that Forgacs could utilise more (12) workstations within its shipyards (each Block requires a workstation) than it actually had (eight or nine);

(c)   some iterations assumed that Forgacs had significantly more workers than it actually had;

(d)   the schedule did not meet ASC’s requirements for erection of the Ships – in particular, the schedule had some of the Ship 03 Blocks being completed after ASC’s required erection dates for Ship 03; and

(e)   there was significant movement in scheduled dates between the delivery of one iteration and the next …

36. Failing agreement, on 7 June 2013, ASC served a notice purporting to terminate the 2HA. On the same day, ASC served a letter stating that it would cease paying a fee fixed at “11.43% of Payable Costs”. It also sent a letter formally directing Forgacs to cease and defer all current work on the Ship 03 Blocks until further notice. Subsequently, it removed from Forgacs PH2 work on certain Ship 02 Blocks and all work on certain Ship 03 Blocks.

37. Following termination of the 2HA, the parties did not return to the strict terms of the Original Contract. Instead, they continued to follow procedures that were similar to the procedures they had followed immediately before entering into the 2HA and used the rates for the work undertaken by Forgacs that they had agreed in March 2013 as part of the budget part of the Baseline True Up. Forgacs ceased to raise any invoices and ASC ceased to pay any amount in respect of the Payable Fee.

38. On 2 May 2014, the parties entered into a Reservation Deed. Under the terms of that Deed, they reserved all of their respective rights in relation to “Existing Arrangements”, which was defined to mean “all of the agreements, arrangements and understandings entered into to the extent they are binding upon the Parties on the day before the Effective Date excluding this document and those agreements, arrangements and understandings binding upon the Parties pursuant to this document”. Also under the Reservation Deed, the parties were required to enter into a “New Arrangements Deed” setting out the terms on which Forgacs would complete the work that it was still contracted to do. The parties complied with that obligation by entering into the NTE Contract on the same day, with the result that 2 May 2014 became “the Effective Date” for the purposes of the Reservation Deed.

39. Forgacs delivered the last of the Blocks it was required to construct under the NTE Contract in December 2015 and, in accordance with the terms of the Reservation Deed, that deed came to an end on 7 January 2016. Forgacs raised a final claim for payment on 4 February 2016 in the sum of $3,418,567.51 (including GST) which is not disputed, although it has not been paid. On 16 February 2016, ASC issued Forgacs with an invoice for payment of “Overpayment of Payable Fee in accordance with clause 21.9.1(d) of the [Original Contract]” totalling $25,603,700.10. It also made a claim for liquidated damages of $1,786,510, which was subsequently revised to $1,284,655.41. On 19 February 2016, ASC made a full demand under the Bank Guarantee, following which it recalculated the amount it claimed was owing to it and sent Forgacs an invoice in the amount of $4,642,381.82. In response, on 29 March 2017 Forgacs sent ASC two invoices claiming amounts in the alternative. The first invoice was for the sum of $40,680,346.30 (including GST). It is the amount Forgacs claims under the 2HA assuming that that agreement came into effect and was not terminated. The second invoice was for an amount of $30,776,013.40 (including GST) and comprises fees claimed by it on the basis that the 2HA came into effect but was validly terminated on 7 June 2013. That claim assumes that the amount payable by ASC in respect of the Payable Fee is to be calculated in accordance with the 2HA up until 7 June 2013 and that the Original Contract only governs the amount payable in respect of the Payable Fee after that date.

40. The parties have largely agreed on the quantum of their respective claims, although there are a number of outstanding issues, which it is expected they will be able to resolve once they know the conclusions of the Court on issues of liability. For that reason, this judgment only deals with issues raised during the course of final addresses. The Court will hear further submissions on quantum if that becomes necessary.

Did clause 2.1 of the 2HA come into effect and, if so, when?

41. ASC contends that clause 2.1 of the 2HA did not come into effect because Baseline True Up was not achieved before it terminated the contract. Forgacs’ primary contention is that clause 2.1 came into effect on 14 December 2012, which it says was the earlier of the dates identified in the 2HA as the “Effective Date”. Alternatively, adopting a suggestion of the Court made during the course of argument, it contends that the earlier of the dates identified in the contract as the “Effective Date” was 28 February 2013 and consequently clause 2.1 came into effect on that date. In response, ASC submitted that that alternative argument was not available to Forgacs because it was not pleaded and is inconsistent with submissions that Forgacs had made.

Principles applicable to the interpretation of the 2HA

42. The principles applicable to the interpretation of the 2HA were not in dispute, although their application was.

43. In determining the meaning of a commercial contract, the task of the Court is to construe objectively the words used by the parties to record the agreement that they reached. In undertaking that task, the Court must construe the contract as a whole. As Gibbs J explained in Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109; [1973] HCA 36 (in dissent, but not on this point):

It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another. If the words used are unambiguous the court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, "even though the construction adopted is not the most obvious, or the most grammatically accurate", to use the words from earlier authority cited in Locke v. Dunlop (1888) 39 Ch D 387 at 393, which, although spoken in relation to a will, are applicable to the construction of written instruments generally; see also Bottomley's Case (1880) 16 Ch D 681 at 686.

44. In construing the words of a commercial contract, the Court may have regard to the surrounding circumstances and the commercial purpose or objects of the contract. That principle was stated in these terms by French CJ, Hayne, Crennan and Kiefel JJ in Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; [2014] HCA 7 at [35]:

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

45. The Court may have regard to the negotiations between the parties for the purposes of determining the surrounding circumstances known to both of them and the commercial purpose or objects to be secured by the contract. However, the Court may not have regard to the parties’ negotiations for the purpose of determining what each party intended to achieve by the contract: Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 352 per Mason J; [1982] HCA 24; Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165; [2004] HCA 52 at [40]; WIN Corporation Pty Ltd v Nine Network Australia Pty Ltd [2016] NSWCA 297; (2016) 341 ALR 467 at [57] per Barrett AJA (with whom McColl JA and Sackville AJA agreed).

46. Generally, a court may not have regard to the subsequent conduct of the parties in interpreting the contract: Agricultural & Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570; [2008] HCA 57 at [35] per Gummow, Hayne and Kiefel JJ, quoting Whitworth Street Estates Ltd v Miller [1970] AC 583 at 603 per Lord Reid. Exceptions may exist where the parties’ subsequent conduct itself provides evidence of the circumstances at the time the contract was entered into or where the conduct amounts to an admission, although where the admission reveals an opinion on a matter of law, such as the construction of a contract, it may be irrelevant or valueless: Johnston v Brightstars Holding Company Pty Ltd [2014] NSWCA 150 at [121] per Basten JA.

ASC’s contentions

47. It is convenient to begin by setting out the arguments advanced by ASC.

48. ASC’s primary submission is that implicit in clause 2.1 of the 2HA is a requirement that the clause will not come into effect until the date on which Baseline True Up was achieved. That conclusion is said to be derived principally from the terms of the contract understood in the context in which the agreement was reached, but is also said to be supported by the parties’ negotiations and their subsequent conduct to the extent that those matters may be taken into account.

49. ASC points to a number of provisions of the 2HA which it submits assume that the operative provisions of the contract will not come into effect until Baseline True Up has been achieved. First, as I have said, it is common ground that the Incentive Fee set out in clause 2.1(c) was only capable of being calculated once Baseline True Up had been achieved. Consequently, clause 2.1(c) could not operate until Baseline True Up had been achieved. The right to the payment of an Incentive Fee was a significant benefit that it was intended would be conferred on Forgacs.

50. Second, clause 4.1(b) provides that “the Schedule Baseline will apply from the Transition Date”. However, the Schedule Baseline is a component of Baseline True Up. Consequently, unless Baseline True Up had been achieved, there is no guarantee that there would be agreement on the Schedule Baseline. But if the Schedule Baseline was not agreed, effect could not be given to clause 4.1(b).

51. Third, clause 2.1(g) provides that the EVMS will be maintained (but not for the purpose of determining the Payable Fee). However, review and approval of the EVMS formed part of the Baseline True Up. From a practical point of view, the EVMS could only be maintained if it had been reviewed and approved by ASC and that was only certain to occur if Baseline True Up had been achieved.

47. Fourth, clause 4.2 sets out various time limits by when work scope changes may be made by reference to “a Block’s Shipping Date”. That must be a reference to the dates that it was agreed would be the shipping dates for each Block as part of the agreement on Baseline True Up. If Baseline True Up was not agreed, there would be no dates by reference to which clause 4.2 could operate.

48. Fifth, under clause 5.1, the obligation to execute a formal agreement (referred to as a “Contract Amendment Proposal” or “CAP”, which was the formal mechanism under the Original Contract by which it could be amended) only arose after Baseline True Up was agreed. It would make no commercial sense for the obligation to execute a formal document embodying the parties’ agreement to arise on agreement to Baseline True Up if the substantive terms of the 2HA could come into effect before Baseline True Up or without Baseline True Up ever being agreed.

49. Sixth, under clause 6.1, the releases provided for in that clause take effect on the Transition Date. However, under clause 4.1, ASC had a right to terminate the 2HA if Baseline True Up was not agreed by 28 February 2013. The result is that, if Forgacs is right, the releases in the 2HA could become effective at a time when ASC still had a right to terminate the contract. It could not have been intended that the releases would take effect even if the agreement was terminated. But if that is right, the parties could not have intended the releases contained in clause 6.1 to operate until Baseline True Up had been agreed.

50. Seventh, if Forgacs primary submission is correct and the Transition Date occurred at the latest on 14 December 2012, that would mean that there would have been a period of time of at least two and a half months where the provisions of clause 2.1 had come into effect and ASC had no right of termination. The parties could not have intended that those provisions would come into effect only to be brought to an end as a result of ASC’s termination if Baseline True Up could not be agreed by 28 February 2013.

51. ASC accepts that its interpretation does not sit easily with the opening words of clause 2.1 and the definition of “Transition Date”. The opening words of clause 2.1 state that the clause comes into effect “on and from the Transition Date”. “Transition Date” is defined to mean the earlier of two dates, one of which is the date on which ASC approves the Baseline True Up. The clause and the definition taken together appear to contemplate that clause 2.1 could come into effect even if ASC has not approved the Baseline True Up. However, ASC makes two broad points about that. First, it points out that the 2HA, and in particular the definitions contained in it, are poorly drafted. The definition of “Transition Date” is circular. It is the earlier of two dates, one of which is the approval by ASC of Baseline True Up. However, Baseline True Up is defined to mean ASC’s review and approval of certain matters “to apply from the Transition Date”. As a result, the definition of “Transition Date” depends on itself. Moreover, the definition of “Transition Date” says that it is the earlier of two dates, one of which is the date set out in clause 4.1(a). However, two dates are set out in clause 4.1(a) and it is difficult to know which date is referred to. To some extent, then, no interpretation is going to accommodate comfortably the words that the parties have used.

52. Second, ASC offers various interpretations of the definition of “Transition Date” that are available on the words used and are consistent with its interpretation of clause 2.1. One is that the definition is catering for the possibility that Baseline True Up might be achieved after 14 December 2012. In that case, the definition of “Effective Date” states that the Effective Date is 14 December 2012. But if Baseline True Up is achieved before that date, it is that earlier date. Another possibility is to read the phrase “the date set out in clause 4.1(a)” as a reference to 14 December 2012, provided that Baseline True Up has been achieved by that date. On that interpretation, the Effective Date is 14 December 2012 (if Baseline True Up has been achieved by that date) or the date Baseline True Up is achieved (if it is achieved on a later date). A third possibility is to read the reference to “the date set out in clause 4.1(a)” as being a reference to the dates set out in the clause and therefore to read the reference to “the earlier of the [dates] set out in clause 4.1(a)” as a reference to 14 December 2012 provided Baseline True Up has been achieved by that date. That interpretation has the same effect as the second possibility. A fourth possibility is to read the reference to the “date set out in clause 4.1(a)” as a reference to the date of completion of the Baseline True Up. On that interpretation, the Effective Date is the earlier of the date of completion of the Baseline True Up or the date on which ASC “Approves” Baseline True Up. ASC accepts that in most cases those two dates will be the same. However, it says that there is a subtle difference between “completion” and “Approval” (as defined in the Original Contract) and the definition is designed to deal with the possibility that those two dates might be different. A fifth possibility simply involves the assertion that clause 2.1 is subject to the implicit contingency that the provisions only take effect if there is a Baseline True Up. A sixth possibility is that “Transition Date” does not bear the defined meaning in the context of clause 2.1

53. ASC’s conclusions are said to be supported by the surrounding circumstances, which are said to demonstrate that a commercial purpose of the 2HA “was to undertake a Baseline True Up as the first priority and before any adjustment was made to the Payable Fee arrangements in the Original Contract”. ASC relies on a number of matters in support of that submission.

54. First, to the knowledge of Forgacs, scheduling was particularly important to ASC.

55. Second, to the knowledge of both parties, from at least late 2011 work under the Original Contract was falling behind schedule, largely as a result of the design changes.

56. Third, from at least late 2011, it was apparent that there was a large backlog of Block Work Packs to be issued by ASC, TCEs to be approved by ASC and CNRs and PNRs. There were also a large number of hours worked by Forgacs in respect of work that had not been formally approved. To the knowledge of both parties, the combined result of those matters was that the EVMS was unreliable.

57. Fourth, ASC points to statements and discussions in connection with negotiations of the 2HA in which ASC stressed and Forgacs accepted the importance of Baseline True Up. So, for example, Mr Cuthill gives evidence of discussions with Forgacs about the need for, and the requirements of, a ‘baseline true up’ during the early discussions concerning contract refresh. ASC also points to a discussion paper prepared by Forgacs in relation to contract refresh, several drafts of which were circulated to ASC between February and April 2012. In that discussion paper, Forgacs said, among other things (quoting from Revision 3 dated 16 April 2012):

The benefits are

1.   Forgacs Staff currently engaged in estimating and producing PAR’s to be redeployed where possible to assessing and implementing change.

2.   Reduce the staff required by ASC to control the current contract conditions which are fluid due to change.

3.   A united focus improving productivity to reduce the EAC.

4.   The most up to date information needs to be used to build the blocks and incorporated as soon as possible (unless Triage advise it is not necessary) to prevent costs being incurred manufacturing the incorrect items.

5.   A reduction in the existing Target Fee of 19%.

6.   Eliminate the potential for commercial conflicts arguing about a reduction in the existing 19% target fee due to circumstances beyond Forgacs’ control.

7.   Reduction in Forgacs’ and ASC’s commercial risk.

8.   To streamline the contractual / commercial relationship between ASC & Forgacs to allow ASC’s project team to direct & prioritise Forgacs in a timely manner.

63. In addition, ASC points to the ASC board paper dated 6 September 2012 which recommended approval of the 2HA. The paper relevantly states:

Legal and contractual

4.9   The [2HA] acts as facilitating document ie, the [Original Contract] will not be modified until certain conditions set out in the [2HA] are achieved. These conditions include:

4.9.1   Establishment of a production and configuration baseline to ASC’s satisfaction

4.9.2   Re-baselining the contract schedule to ASC’s satisfaction

4.9.3   Re-establishing Forgacs’ EVMS and reporting outputs to ASC’s satisfaction.

Similarly, Mr Cuthill gives evidence that following the board meeting that considered that paper he and Mr Graham Vincent, a Commercial Manager with ASC, met with representatives of Forgacs on 16 October 2012, at which time they told Forgacs that “the Baseline True Up process provided for in the Heads of Agreement was urgently required in order for both ASC and Forgacs to regain full project management control of the Original Contract”.

64. Fifth, ASC points to the fact that even after 14 December 2012, the fee arrangements that had been put in place prior to the signing of the 2HA remained in effect, which ASC submits indicates that Forgacs did not think that it could claim fees pursuant to the 2HA until after Baseline True Up had been agreed. ASC also points to the fact that the draft deed formally amending the Original Contract to give effect to the 2HA included a clause in the following terms:

Fee Payments

Payable Fee for pursuant [sic] to the Agreement [that is, the Original Contract] for all work undertaken up to and including the monthly progress claim prior to the date of this deed shall be calculated at a rate of twelve percent (12%).

That clause is said to assume that the Transition Date would not occur before Baseline True Up because the formal amendment was contingent on Baseline True Up and under clause 2.1(a) of the 2HA the Payable Fee of 12 per cent was payable up until the Transition Date.

Forgacs’ contentions

65. Forgacs’ primary contention is that clause 2.1 contains a clear statement that its provisions will come into effect on the “Transition Date”. “Transition Date” is defined in the 2HA to be the earlier of two dates. One of those dates is the date on which ASC approves Baseline True Up. The other is the date set out in clause 4.1(a). Two dates are set out in clause 4.1(a): 14 December 2012 and 28 February 2013. Forgacs submits that, of those two dates, the definition of “Transition Date” must be referring to 14 December 2012. It cannot be referring to 28 February 2013 because that is the date on which ASC’s right of termination arose.

66. ASC also suggested that a third date was set out in clause 4.1(a) by reference; and that was the date that Baseline True Up was agreed. In answer to that suggestion, Forgacs submits that the reference in the definition of “Transition Date” to the date referred to in clause 4.1(a) is plainly a reference to a named date, not one identified by reference to the happening of an event. Moreover, to interpret it as a reference to the date Baseline True Up is completed would make a nonsense of the definition. On that interpretation, the Transition Date is the earlier of the date Baseline True Up is completed and the date upon which ASC Approves the Baseline True Up. But there is no such date because those two events fall on the same date. And in any event, if that is what the parties meant, they surely would have said that the Transition Date was simply the date on which ASC Approved the Baseline True Up.

67. As I have said, Forgacs accepts that without an agreement on Baseline True Up, clause 2.1(c) (relating to the payment of the Incentive Fee) cannot operate. However, it makes no claim under that clause; and it accepts that, in agreeing to the 2HA, it ran the risk of losing an entitlement to an Incentive Fee if Baseline True Up was not agreed.

68. Forgacs denies that the operation of any other clause of the 2HA depended on agreement on the Baseline True Up. In relation to references to “Schedule Baseline” in clause 4.1, those references did not require agreement on Baseline True Up. They simply required agreement on “the schedule setting out at least the Shipping Dates for each Block that will apply from the Transition Date” (to quote from the definition of “Schedule Baseline”). In fact, from time to time, ASC and Forgacs did agree on operational dates for the shipment of Blocks. That was necessary in order to book barges to transport the Blocks to Adelaide for assembly. According to Forgacs, those agreements met the requirements of clause 4.1.

69. Similarly, it was not necessary to agree on the Baseline True Up in order to maintain the EVMS. It may be that the EVMS could not be used for all it could have been used if Baseline True Up had been agreed and included in the system. However, the parties did reach agreement on many of the components of Baseline True Up. To the extent that agreement could be reached, the relevant data were included in the system and in that way Forgacs was able to maintain the system following execution of the 2HA.

Consideration

70. I prefer the interpretation advanced by Forgacs, although for reasons I will explain, I think the reference in the definition of “Transition Date” to the date referred to in clause 4.1 is a reference to 28 February 2013, not a reference to 14 December 2012.

71. The principal difficulty with the interpretation advanced by ASC is that it involves a major departure from the language used in clause 2.1 of the 2HA. As Forgacs points out, that clause plainly states that the changes set out in the clause “will apply on and from the Transition Date”. “Transition Date” is defined as the earlier of two dates. One of those dates is the date upon which ASC “Approves” the Baseline True Up. The other is a date set out in clause 4.1. By defining the Transition Date as the earlier of two dates, one of which is the date on which ASC Approves Baseline True Up, the definition and clause must contemplate the possibility that the clause could come into effect before ASC “Approves” Baseline True Up. In giving ASC a right of termination if Baseline True Up is not agreed by 28 February 2013, the 2HA gives ASC but not Forgacs an option to avoid or ameliorate that consequence. It is true that the definition of “Transition Date” is concerned with the date on which ASC “Approves” the Baseline True Up. On the other hand, clause 4.1 is concerned with whether Baseline True Up has been “agreed”. However, the 2HA is an informal agreement, not obviously drafted by lawyers. Lawyers may regard the drafting as sloppy, but it could not seriously be suggested that Approval by ASC and agreement by the parties to Baseline True Up were meant to convey different concepts.

72. ASC advances various arguments for why the interpretation set out in the previous paragraph cannot be right. But in my opinion, those arguments exaggerate the difficulties with the interpretation and involve an impermissible rewriting of the contract.

73. The first step in ASC’s argument, or at least an element of it, is to point to the problems with the definition of “Transition Date”. One problem is said to be circularity. The other is that there is no single date identified in clause 4.1.

74. In my opinion, the problem with circularity is more apparent than real. It was not necessary to know the Transition Date in order to determine Baseline True Up. The parties had no difficulty in trying to agree Baseline True Up without knowing the Transition Date. At most, the reference to “Transition Date” in the definition of “Baseline True Up” required the parties to make an assumption about when the Transition Date would be for the purposes of reaching agreement on Baseline True Up. That involved reaching agreement on the date from which their agreement on Baseline True Up would operate if Baseline True Up were the earlier date identified in the definition of “Transition Date” or determining Baseline True Up on the basis that it applied from the date specified in clause 4.1 if that date was the earlier date.

75. The absence of a single date in clause 4.1 raises a problem in interpreting the definition of “Transition Date”. But that problem is unavoidable; and once that issue is resolved, there is no reason why the definition cannot operate according to its terms.

76. One contention advanced by ASC is that the difficulty with the definition of “Transition Date” can be avoided if the reference to “Transition Date” in clause 2.1 is read as not picking up the definition. However, the problem with that contention is that the phrase “Transition Date” in clause 2.1 is plainly meant to identify a particular date and the words are incapable of doing so unless they pick up the definition.

77. It is not entirely clear how ASC says that the interpretation for which it contends can be derived from the words used in the contract. As I have said, its primary contention appears to be that the words of clause 2.1 carry with them an implication that the operative provisions contained in paras (a) to (j) do not come into effect until Baseline True Up had been agreed. But there are a number of difficulties with that contention.

78. First, the only paragraph of clause 2.1 that might be said to assume that Baseline True Up had been agreed, and therefore carry with it the implication, is para (c). None of the other paragraphs makes the assumption that Baseline True Up has been agreed. Consequently, it is difficult to see how it could be said that those paragraphs carry with them the implication. Even in the case of para (c), Attachment A, which sets out in detail how the Incentive Fee is to be determined, assumes that some elements of Baseline True Up have been agreed. But it does not appear to assume that every element of Baseline True Up has been agreed.

79. Second, the implication is inconsistent with the plain words of the clause. The clause states that the provisions set out in the clause “will apply on and from the Transition Date”. The parties have specifically stated when the clause takes effect. It is difficult to see how objectively they could have intended that some additional or other condition would apply to the operation of the clause.

80. Third, as I have said, the implication is difficult to reconcile with the definition of “Transition Date”, which itself has as one of its elements approval of Baseline True Up. ASC offers various interpretations of the definition that are intended to give it meaning even if clause 2.1 carries with it the implication for which ASC contends. But it is noteworthy that ASC does not express a preference for any of those alternatives. Nor does it give a clear explanation of why the parties would have chosen any of them. Each of them involves a strained interpretation of the words used. On its first interpretation, ASC contends that the definition is to be read as stating that the Effective Date is to be no later than 14 December 2012 (assuming that Baseline True Up is agreed). On its second interpretation, the Effective Date is no earlier than 14 December 2012 (assuming that Baseline True Up is agreed). Other interpretations also produce one of those results. Each of them involves adding to the language of the definition. Moreover, there is no apparent reason why the parties would have regarded either outcome as important. Taking the first alternative, why was it important to the parties that clause 2.1 should operate from 14 December 2012 whenever Baseline True Up was agreed? In addition, that interpretation must assume that the provisions of clause 2.1 were capable of operating retrospectively in a case where Baseline True Up was not agreed until after 14 December 2012. However, it is not obvious that that is the case. For example, to the extent the parties were not following the procedures set out in clause 2.1(b) before that clause became operative, they could not follow those procedures retrospectively.

70. Similarly, taking the second alternative, why was it important to the parties that clause 2.1 should not operate before 14 December 2012, even if Baseline True Up was agreed before that date?

71. There appears to be a suggestion in some of the submissions made by ASC that the implication for which it contends comes from the definition of “Transition Date” itself. If ASC does advance that argument, it is an argument that does not sit well with another of ASC’s contention which is that the principal task for the Court is to interpret clause 2.1 and the defined terms it contains should not be construed divorced from the substantive terms of the contract. Moreover, it is difficult to see how an implication that the operation of the contract or some part of it is conditional on the happening of a particular event (the agreement of Baseline True Up) can arise from a definition which simply says that the Transition Date is the earlier of two dates identified in the definition. That is particularly so when one of those two dates is itself the date of the occurrence of the condition (approval of Baseline True Up).

72. As I have said, ASC advances a number of reasons for why the 2HA carries with it the implication for which it contends. Undoubtedly, the most persuasive of those is the fact that clause 2.1(c) appears to assume that Baseline True Up has been agreed before the clause takes effect because its operation depends on matters that had to have been agreed as part of the agreement on Baseline True Up. ASC says with some force that it could not have been intended by the parties that the agreement would take effect without Forgacs having an opportunity to earn an Incentive Fee.

73. However, in my opinion, this consideration cannot be decisive. The 2HA was designed to address at least three main issues. One was the fact that the parties had departed from the terms of the Original Contract in substantial respects, leaving it uncertain what their respective rights and liabilities were. Both parties had an interest in resolving that uncertainty. A second was the fact that the procedures for dealing with variations needed to be simplified so that the parties could focus on completing the work the subject of the contract rather than spending time complying with the cumbersome requirements of the Original Contract. A third was the need to reach agreement on precisely what further work needed to be done and a schedule for that work. The first two objectives were achieved by the terms of the 2HA itself. The third could only be achieved through an agreement on Baseline True Up. Plainly, if Baseline True Up was agreed, there was no reason why the 2HA, and clause 2.1 in particular, should not take effect according to its terms. The question is what was to happen if, contrary to the expectations of the parties, they could not reach agreement on Baseline True Up. On the approach adopted by ASC, the parties were effectively placed in the position they were in before the 2HA was signed. On the approach adopted by Forgacs, ASC was given an option. It could terminate the 2HA. Alternatively, it could elect not to terminate the 2HA, with the result that it would not have the benefit of the Baseline True Up. From ASC’s point of view, it would not be bound by the 2HA without agreement on the Baseline True Up if it did not wish to be. But it had an option to take some of the benefits of the 2HA without agreement on Baseline True Up and as compensation it would not have to pay an Incentive Fee. From Forgacs’ point of view, it ran the risk of losing any right to an Incentive Fee if agreement was not reached on Baseline True Up. However, it still got the other benefits of the contract; and, in particular, obtained certainty that it would earn a Payable Fee that was at least 12 per cent of Payable Costs. Looking at the matter objectively, that does not strike me as an uncommercial outcome; and certainly not one which would justify doing violence to the language of the contract.

74. ASC points to other provisions of the 2HA which appear to assume that Baseline True Up would be agreed. However, none of those provisions seems to me to be decisive.

75. Clause 4.1(b) assumes that a Schedule Baseline would be agreed by the Transition Date. It says nothing about Baseline True Up. “Schedule Baseline” is defined as “the schedule setting out at least the Shipping Dates”. Those dates, no doubt, would be agreed as part of Baseline True Up. But it does not follow that agreement on them necessitated agreement on Baseline True Up. The position appears to have been that the parties informally agreed on shipping dates at an operational level; and no reason was advanced why that agreement was not sufficient for the operation of clause 4.1(b). A similar point can be made relation to ASC’s argument based on clause 4.2.

76. It is not necessary to add anything to Forgacs’ point about the EVMS. As I have explained, maintenance of that system did not depend on agreement on Baseline True Up.

77. Under clause 5.1, the obligation to execute a CAP was conditional on agreeing Baseline True Up rather than on the occurrence of the Transition Date. But clause 5.1(b) makes it clear that the 2HA remained a binding agreement even if the parties failed to sign a CAP. It may have made more sense to make the obligation to execute a CAP conditional on the occurrence of the Transition Date rather than agreement on Baseline True Up, but that oddity is not cured by making the operation of clause 2.1 conditional on agreement on Baseline True Up; and the contract does not become unworkable because, in the events that happened, the parties never came under an obligation to execute a CAP.

78. The relationship between clause 2.1 coming into effect, the releases contained in clause 6.1 and ASC’s right of termination under clause 5.1 if Baseline True Up was not agreed by 28 February 2013 has not been clearly thought out by those drafting the 2HA. If Forgacs is right, clause 2.1 and the releases could come into effect, even though ASC retained a right of termination. If ASC is correct, the right of termination seems to be of little value. It could not be exercised if Baseline True Up was agreed before 28 February 2013. Although the 2HA remained on foot after that date, the only obligation it placed on the parties appears to have been an obligation to continue to negotiate the Baseline True Up, although, as both parties point out, it appears that the obligation under clause 4.1(a) to use all reasonable endeavours to complete the Baseline True Up came to an end on 14 December 2012. If the obligation to keep negotiating was the only obligation that continued after 28 February 2013, it is difficult to understand why the right of termination was one limited to ASC.

79. There can be no doubt that the interpretation contended for by ASC gives rise to fewer practical problems than the interpretation contended for by Forgacs. As I will explain, in my opinion, those practical problems can be reduced by interpreting the reference to the date in clause 4.1 in the definition of “Transition Date” as a reference to 28 February 2013. But whichever date is chosen, it seems to me that the practical problems cannot govern the interpretation of the agreement. They do not appear to be major. The procedures contemplated by clause 2.1(a) were largely put into effect before the 2HA was executed. If the agreement came into effect and was subsequently terminated because Baseline True Up had not been agreed and the parties had complied with the agreement while it was in force, that may have involved them returning to the procedures set out in the Original Contract and may have involved an adjustment in the payments that Forgacs had received. No doubt, the longer the 2HA remained in force, the more difficult it would be to revert to the Original Contract. However, there is no reason why the adjustments that were required if the 2HA was terminated could not be made, particularly if termination occurred within a reasonable time after the agreement came into effect.

80. The position is not altered by the negotiations and subsequent conduct relied on by ASC. To the extent that the negotiations identify the purposes of the 2HA those purposes have been described earlier; and, as I have explained, they do not obviously favour the interpretation advanced by ASC.

81. In some cases, the material relied on by ASC goes beyond identifying the purposes of the 2HA. The ASC board paper dated 6 September 2012 prepared by Mr Wallace is an example. To the extent that Mr Wallace expresses the view in that document that the 2HA would not take effect until certain conditions are satisfied, the document is clearly irrelevant to the construction of the 2HA.

82. The same is true of the subsequent conduct relied on by ASC. The fact that Forgacs did not claim a fee in accordance with clause 2.1 at any time prior to termination of the 2HA is not relevant to the interpretation of the contract. The evidence is not relied on as evidence of the commercial purpose of the 2HA. Rather, ASC seeks to rely on the evidence as demonstrating that Forgacs did not believe it had an entitlement to claim a fee in accordance with the 2HA. Whether that inference can be drawn is doubtful. In any event, at best it is an admission of law that can carry no weight.

83. Nothing can be inferred from the draft formal agreement to give effect to the 2HA. Again, the most that can be inferred from that draft is that the author of the draft had a certain view of the meaning of the 2HA. But that view is not relevant to the correct construction of the agreement.

84. That leaves the question whether the expression “the date set out in clause 4.1(a)” in the definition of “Transition Date” is a reference to 14 December 2012 or to 28 February 2013.

85. ASC submits that it is not open to the Court to conclude that the date is 28 February 2013 because that possibility was not pleaded by Forgacs. I do not accept that submission. In para 49(c)(i) of its Response to Second Further Amended Technology and Construction List Statement, ASC pleads that if the “Transition Date” did occur it occurred on 28 February 2013. It is plain from the particulars of that allegation that that was said to be so because that was the date picked up by the definition of “Transition Date” from clause 4.1. In opening, Mr Hutley SC, who appeared for Forgacs, submitted that it did not matter to Forgacs whether the date was 14 December 2012 or 28 February 2013. The issue was raised during the course of submissions. It concerns the correct construction of the contract, which is a legal question. It is difficult to see what additional evidence ASC could have led on the question; and ASC did not seek to identify any. To the extent that any evidence was relevant to the question, it is to be expected that ASC would have led the evidence in support of its own case. For those reasons, in my opinion, it is open to the Court to conclude that the date was 28 February 2013.

86. The principal reason advanced in favour of 14 December 2012 being “the date set out in clause 4.1(a)” is that ASC obtained a right to terminate the contract on 28 February 2013. The submission appears to be that it makes no sense for the parties to give ASC a right to terminate the contract immediately after it came into effect if Baseline True Up had not been agreed. However, that is not so. If the date is 28 February 2013, that would mean that ASC could avoid the position where it ever became bound by the obligations set out in clause 2.1 if Baseline True Up was not agreed prior to 28 February 2013. It would not be bound by those obligations before 28 February 2013 because the Transition Date would not occur before that date. It could avoid being bound by those obligations after 28 February 2013 by terminating the contract immediately. On the alternative interpretation, there would be an inevitable hiatus if ASC elected to exercise a right of termination. The Transition Date would occur no later than 14 December 2012. Consequently, the obligations imposed by clause 2.1 would come into effect on that day. Again, assuming that Baseline True Up was not agreed, they would remain in effect at least until 28 February 2013, because ASC had no right of termination until then. That is not something that the parties are likely to have intended.

87. It is true that a hiatus could still have arisen if ASC did not exercise the right of termination immediately, as happened in this case. However, two points may be made about that. The first is that that hiatus is one that could have been avoided by ASC. The second is that there is a question how long that hiatus would last. That depends on by when the right of termination had to be exercised, a question to which it will be necessary to return.

88. It is also true that adopting 28 February 2013, rather than 14 December 2012 as the date referred to in clause 4.1, does not solve the difficulty with clause 6.1. If Baseline True Up is not agreed, the release provided for in that clause will still come into effect before ASC obtains a right of termination, which raises a question concerning the effect of the release if the contract is subsequently terminated. However, that is an issue that arises whichever date is chosen.

89. The result is that, in my opinion, the Transition Date occurred on 28 February 2013.

Was ASC’s termination of the 2HA effective?

101. Forgacs advances two reasons why ASC’s termination of the 2HA was ineffective. The first is that ASC by its conduct elected to affirm the contract before purporting to terminate it. The second is that the right of termination of the 2HA was subject to an implied limitation that the right be exercised within a reasonable time, and a reasonable time had elapsed at the time ASC purported to terminate the contract.

Election

102. The relevant legal principles relating to election are not in dispute. They were explained in these terms by Lord Atkin in United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30:

[I]f a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act showing that he has chosen the one he cannot afterwards pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose.

See also Wendt v Bruce (1931) 45 CLR 245 at 253 per Gavan Duffy CJ and Starke J; [1931] HCA 9; Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646 per Stephen J and at 655-6 per Mason J; [1974] HCA 40.

103. The act constituting an election must be unequivocal in the sense that “it is consistent only with the exercise of one of the two sets of rights and inconsistent with the exercise of the other”: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 646 per Stephen J. As Brennan J said in Immer (No 145) Pty Ltd v Uniting Church in Australia Property Trust (NSW) (1993) 182 CLR 26; [1993] HCA 27, “the right to terminate is not necessarily lost by the promisee doing any act consistent with the continuance of the contract. If the act is also consistent with the reservation of a right to terminate in certain events, the right to terminate is not lost by the doing of the act”: at 30. A person is not bound to make an election immediately and may delay their decision so long as they do not affirm the contract in the meantime and so long as the delay does not prejudice the other party: Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 656 per Mason J.

104. The mere fact that a party’s conduct is consistent with a continuation of the contract does not necessarily amount to an election to affirm the contract. The question is whether, having regard to all the facts, the conduct can only be explained as involving a decision to affirm the contract rather than to terminate it. As Glass JA (with whom Street CJ agreed) said in Champtaloup v Thomas [1976] 2 NSWLR 264 at 269:

It is always necessary to examine the conduct relied upon as an affirmation in its particular evidentiary setting. The question must then be answered whether the party able to rescind has communicated to the other party an unequivocal election to affirm, i.e. to renounce its right to rescind. The materials upon which the decision is to be made will include any reservations which have also been communicated. The answer to be given is a decision of fact based upon all the evidentiary data. There is no overriding principle of law that an act done under the contract will always communicate the decision to affirm, regardless of the surrounding circumstances.

105. That case involved the contract for the sale of a house. The contract granted the purchasers a right to rescind if the land was affected by certain planning schemes or proposals. On 3 May 1974, the purchasers applied for a certificate under s 342AS of the Local Government Act 1919 (NSW), which was received on 7 May 1974. That certificate disclosed that the land was within a Foreshore Scenic Protection Area, which was held to be a provision of a relevant planning scheme. It also stated that access to the property would be affected by a proposed county expressway. On 8 May 1974, the purchasers’ solicitors wrote to the Department of Main Roads for clarification of the position. On 20 May 1974, which was the last day for making requisitions under the contract, the purchasers’ solicitors sent a number of requisitions on title. The requisitions referred to the certificate and stated that the purchasers reserved their rights of termination under the contract. The vendor’s solicitors replied to the requisitions on 29 May 1974. The question was whether, by making the requisitions, the purchasers had elected to affirm the contract. The Court of Appeal held that they had not. Glass JA gave the following reasons (at 268):

The making of requisitions was an act done in the exercise of rights under the contract. But the right was exercised in such manner as clearly to reserve the purchasers’ concurrent right under cl. 17 to rescind by reason of the matters revealed by the s 342AS certificate. They were entitled to keep their options open, and it is not suggested that the delay was prejudicial to the vendors. The letter of 20th May, 1974, may have been an act adverse to the vendors in that it made contractual demands upon them. But it did not induce them to believe that performance of the contract was being unequivocally and unconditionally required.

106. It is not necessary that the electing party intend to make an election. Nor is it necessary that the electing party appreciate that he or she has a right in respect of which the election is to be made. As Mason J explained in Sargent v ASL Developments Ltd (1974) 131 CLR 634 at 658 “[i]f a party to a contract, aware of a breach going to the root of the contract, or of other circumstances entitling him to terminate the contract, though unaware of the existence of the right to terminate the contract, exercises rights under the contract, he must be held to have made a binding election to affirm”. See also Tropical Traders Ltd v Goonan (1964) 111 CLR 41 at 55 per Kitto J.

107. Forgacs contends that ASC elected to affirm the 2HA in three ways. First, in the period following 28 February 2013, the parties did not comply with the procedure prescribed by clause 7 of the Original Contract but instead complied with the procedure set out in clause 2.1(b)(i)-(iv) of the 2HA. Second, pursuant to clause 2.1(f) of the 2HA, ASC exercised its right under clause 2.1(f) to integrate its personnel into the Forgacs internal production meetings and schedule discussions. Third, ASC exercised its rights under clause 2.1(h) to require Forgacs to store its steel plate at no cost to Forgacs.

108. In my opinion, none of the conduct relied on amounted to an unequivocal act showing that ASC had chosen to affirm the 2HA.

109. It is common ground that the parties started following the procedures set out in clause 2.1(b)(i)-(iv) before they executed the 2HA. Forgacs makes two points about that fact. First, it points out that, although the parties had been following a procedure by which ASC would provide Forgacs with authorities to proceed for some time, ASC continued to provide Forgacs with Purchase Orders. It only ceased to do so on or about 5 November 2012. That was a critical change. Second, it says that the parties’ prior conduct was irrelevant in any event. What was important was that following the Effective Date ASC was exercising a contractual right in following the procedure set out in clause 2.1(b), which was a right it did not have before that date.

Misleading and deceptive conduct claim

139. Having regard to the conclusions I have reached, this claim does not arise. However, I should deal with it in the event that I am wrong in relation to the contract claim.

Relevant legal principles

140. ASC claims damages under s 236 of the Australian Consumer Law (ACL) for a contravention of s 18, which provides that “A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”.

141. Section 4 of the ACL relevantly provides:

Misleading representations with respect to future matters

(1)   If:

(a)   a person makes a representation with respect to any future matter (including the doing of, or the refusing to do, any act); and

(b)   the person does not have reasonable grounds for making the representation;

the representation is taken, for the purposes of [the ACL], to be misleading.

(2)   For the purposes of applying subsection (1) in relation to a proceeding concerning a representation made with respect to a future matter by:

(a)   a party to the proceeding; or

(b)   any other person;

the party or other person is taken not to have had reasonable grounds for making the representation, unless evidence is adduced to the contrary.

(3)   To avoid doubt, subsection (2) does not:

(a)   have the effect that, merely because such evidence to the contrary is adduced, the person who made the representation is taken to have had reasonable grounds for making the representation; or

(b)   have the effect of placing on any person an onus of proving that the person who made the representation had reasonable grounds for making the representation.

142. Whether conduct is misleading or deceptive must be answered by considering the conduct as a whole and in light of the surrounding circumstances. As French CJ explained in Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [25]; [2009] HCA 25:

Characterisation [of conduct that is misleading or deceptive or likely to mislead or deceive] is a task that generally requires consideration of whether the impugned conduct viewed as a whole has a tendency to lead a person into error. It may be undertaken by reference to the public or a relevant section of the public. In cases of misleading or deceptive conduct analogous to passing off and involving reputational issues, the relevant section of the public may be defined, according to the nature of the conduct, by geographical distribution, age or some other common attribute or interest. On the other hand, characterisation may be undertaken in the context of commercial negotiations between individuals. In either case it involves consideration of a notional cause and effect relationship between the conduct and the state of mind of the relevant person or class of persons. The test is necessarily objective. [Footnotes omitted].

143. There is a question whether, in the case of a corporation, it is necessary to adduce evidence that the person making the representation on behalf of the corporation had reasonable grounds for making it or whether it is sufficient if evidence is adduced that the corporation itself had reasonable grounds for making the representation. The balance of authority in relation to the predecessors to s 4 appears to be in favour of the latter proposition: see Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd [2014] NSWCA 158 at [192] per Gleeson JA (with whom Ward and Emmett JJA agreed). However, for reasons which will become apparent, it is not necessary to address the issue in this case.

ASC’s case

144. ASC alleges that during the period between at least October 2011 and November 2012, Forgacs made the following representations:

1. The EVMS Data in that period was understating the true state of Forgacs’ progress in respect of the relevant Block Work Pack, Purchase Orders and Blocks (first representation);

2. Consequently, the EVMS Data in that period was understating Forgacs’ true progress, CPI and entitlement to Payable Fee calculated in accordance with the Original Contract (second representation);

3. Forgacs’ performance, progress, CPI and entitlement to Payable Fee calculated in accordance with clauses 21.9, 21.10 and 22.2 of the Original Contract would only improve over time as outstanding TCEs were issued, outstanding CNRs were completed and unbudgeted work was approved and included in the EVMS (third representation); and

4. Forgacs’ performance, progress, CPI and entitlement to Payable Fee in respect of Ship 02 would be better than in respect of Ship 01 (fourth representation).

145. The first and second representations are representations of fact. They are representations about the accuracy of the EVMS at the time the representations were made, which involves a statement of fact. Whether each representation was misleading or deceptive depends on whether the relevant fact was true or false. The third and fourth representations were representations concerning the future. They were predictions about what would happen to the measurement of Forgacs’ performance in the future in certain circumstances. In accordance with s 4 of the ACL, whether the representations were misleading or deceptive depends on whether Forgacs had reasonable grounds for believing that what was predicted would come true. They were not misleading or deceptive merely because, in the events that happened, they did not come true.

146. ASC pleads that the representations were made in various documents provided to ASC by Forgacs. The documents consist largely of Earned Value Management Reports, Monthly Progress Reports and “Read-Ahead Material” prepared by Forgacs for the purposes of Bi-Annual meetings. The first document relied on by ASC is an Earned Value Management Report issued by Forgacs to ASC in October 2011. In that report, Forgacs states that the CPI was 0.80. However, It went on to say that “[t]aking consideration of PARs, AUW [Authorised Unpriced Work] and WQ [Work Queue], the adjusted SPI and CPI are 0.89 and 0.91 respectively”. It also stated:

Forgacs has started to release production work orders to the shop floor for the Rev B work. At present there is no approved budget for this work. This is going to impact on the CPI figures going forward. At present there are 5200 hours book to the rework for the month of September.

147. Similar statements were made in the Monthly Status Reports. The clearest examples give some information about work that had not been included in the EVMS (“Forgacs currently has a backlog of approximately 90 work packs requiring TCE’s to be submitted to ASC”; “Forgacs currently has a backlog of approximately 210 work packs requiring TCE’s to be submitted to ASC”), state the then current CPI and SPI and state that an improvement in both is expected once the additional work is accounted for (“PARs and AUW issues are still being resolved and improvement on both SPI and CPI is expected once completed”), although later monthly reports simply gave information about the then current CPI and SPI without predicting improvements. An example is the last monthly report issued before the 2HA was signed, which was the AWD Project Status Report for the month of September 2012 issued on 15 October 2012 (after the 2HA was approved by the ASC board). That report comments on progress in dealing with the backlog of TCEs (which had “reduced to approximately 131 work packs requiring TCE’s to be submitted to ASC”) and CNR estimates (“There is currently a significant back log of approximately 95 CNR’s waiting estimation”). It states the CPI for the month (0.84) and observes that it is the same as the previous month. It also states that “In the month of August 5181 hours of revisions or CNR’s was released to the production”. It says nothing about what the CPI would have been if the backlog had been dealt with and makes no prediction about the CPI going forward. It appears that statements about an expected increase in the CPI were dropped from the monthly reports after the one for May 2012, which was issued on 13 June 2012.

148. The last document relied on by ASC is the “Read-Ahead Material” provided to ASC in connection with the Block Subcontractor Bi-Annual Review Plan for 15-16 November 2012, which gave the SPI and CPI for the month and stated:

When reviewing both the Period and Cumulative data, the CPI figures for several work packages are still suffering from working on a large amount of additional scope, yet to be included in the PMB. The ‘True Up’ process that is currently underway will significantly improve Forgacs ability to conduct meaningful Period and Cumulative EVM analysis.

However, that document was issued after the 2HA was entered into and does not obviously contain any statement about the likely improvements in the CPI. For those reasons, it is difficult to understand its relevance.

149. ASC also relies on an email dated 28 February 2012 from Mr Mark Bailey, the Commercial Manager for Forgacs, to Mr Cuthill in which Mr Bailey says:

Tony & Steve are having trouble getting the proposed target fees across the line with Stephen Forgacs [the Managing Director of Forgacs].

Stephen’s concern is that if all the unbudgeted work (pars/copper rework/revised work packs etc) was taken into account our cpi performance would be better & fee paid would be greater than the existing position.

150. In its written submissions, ASC points to other examples of where similar statements were made, including in emails sent by Forgacs to ASC and in conversations that Mr Cuthill had with representatives of Forgacs, and Mr Greg Searles in particular, at monthly meetings. It also points to the contract refresh negotiations in which Mr Searles said “Forgacs’ performance on Ship 02 would be better than its performance on Ship 01”. However, those statements do not form part of the pleaded case and it is not clear that they add substantially to the representations relied on.

151. ASC pleads that the representations were misleading and deceptive because the EVMS Data had in fact overstated not understated CPI. It gives as particulars of that allegation that from around June 2013, when the Baseline True Up was largely completed, the EVMS Data showed that the CPI was considerably less than had been represented to ASC and worsened steadily after about June 2013, with the result that the CPI in respect of Ship 02 was lower that the CPI in respect of Ship 01.

152. Although ASC pleads that it relied on the representations in various ways, in final submissions it confined its reliance case to entering into the 2HA and claimed as damages the amount that Forgacs would have been entitled to recover in these proceedings if the 2HA had not been entered into.

Did Forgacs engage in misleading or deceptive conduct?

153. I accept that Forgacs made the pleaded representations. The first three representations fairly arise from at least some of the documents that form part of the pleaded case. The fourth representation may be implied from the third and the fact that, apart from some overlap, work was generally done on Ship 02 at a later time than the work on Ship 01. However, there is a question concerning precisely when the representations were last made. Of the documents relied on in the Further Amended Technology and Construction List Cross-Claim Statement, the last to assert that CPI would improve was the monthly report for May 2012, which was provided to ASC in June 2012. It is not clear how the later documents support the pleaded case.

154. Mr Cuthill gave the following unchallenged evidence:

During this period, Forgacs (primarily through Greg Searles at monthly meetings) often told us that:

(a)   they were actually performing much better than their EV [Earned Value] Data was showing;

(b)   the only reason that Forgacs was not achieving a CPI closer to 1 was because of the Unbudgeted Scope, not because of Forgacs’ performance; and

(c)   Forgacs’ performance on Ship 02 would be better than its performance on Ship 01.

However, it is unclear what Mr Cuthill means by “this period”. In context, the period appears to be the same period as the period in which Forgacs was asserting in the monthly reports that CPI would improve.

155. ASC also relies on an email dated 17 October 2012 from Mr Cuthill to Mr Searles, which relevantly says:

The first activity that needs to happen is to obtain an accurate picture of where we are in terms of physical progress against every open work order as from speaking to a number of people at Forgacs, the belief is that you have earned more value than is currently being shown and this will skew all data ...

However, that statement can hardly be regarded as a representation by Forgacs.

156. The result is that, even if ASC is permitted to go beyond the pleaded case, it is not clear that the representations made by Forgacs were made after June 2012.

157. In the Further Amended Technology and Construction List Cross-Claim Statement, ASC pleads that the representations were misleading and deceptive because “Forgacs’ performance, progress and CPI did not in fact improve over time, but rather worsened steadily after about June 2013 when the Baseline True Up process provided for in the [2HA] had been largely completed in respect of the SOW [Scope of Work] and the TCE …”. It also pleads that the representations were misleading and deceptive because “Forgacs’ performance, progress and CPI in respect of Ship 02 was not in fact better than in respect of Ship 01, but rather was worse”. It claims that, insofar as the representations were representations as to future matters, Forgacs had no reasonable grounds for making them.

158. ASC sought to expand that case in its submissions. It submitted that the first and second representations were false for two reasons. The first was because the CPI did not improve significantly after the processing of the unprocessed PARs and TCEs, apart from a small increase in CPI in March 2013 from 0.77 to 0.79 when the results of the Baseline True Up in relation to scope was entered into the EVMS. Following that increase, there was a gradual decline in CPI so that, for example, it was 0.73 by January 2014.

159. The second was because Forgacs claimed for work done before fixing defects and it became apparent at least from March 2013 that the hours required to repair defects were very substantial. That is said to be evidenced by two matters. The first is that from about late February or March 2013, Forgacs started tracking the number of hours spent rectifying weld defects and repairs and those results showed that 5,996 hours were spent in March 2013, 21,304 hours in April 2013, 14,311 hours in May 2013, 7,846 hours in June 2013 and 11,240 hours in July 2013, which represented between approximately 5 per cent and 20 per cent of total hours worked. Second, the Earned Value data showed that in most months Forgacs expended many more hours than it earned in value. So, for example, in January 2013, Forgacs expended 115,596 hours of work to achieve 41,698 hours of earned value. The figures were comparable in February, May and July 2013. Indeed, the explanation for the gradual decline in the CPI appears to be that a substantial proportion of hours worked related to repairing defects. ASC submits that it is to be inferred that the position was similar at the time the representations were made, and the representations were false for that reason.

160. The third and fourth representations are said to have been misleading and deceptive for similar reasons. ASC also submits that Forgacs had no reasonable grounds for making the representations. In support of that contention it refers to a number of matters. First, it points to evidence that Forgacs had a practice of claiming EV (Earned Value) progress on Blocks that contained defects. In that regard, it places particular emphasis on an email Mr David Miller, Forgacs Managing Director of Shipbuilding, sent to Mr Cuthill on 25 April 2013 in which Mr Miller told Mr Cuthill of the practice. It is submitted that there is no evidence that ASC was aware of the practice before that time.

161. Second, ASC points to a substantial number of documents which demonstrate the high level of defects in the work undertaken by Forgacs. Those documents were largely created in the period April to June 2013 or later. However, ASC submits that it is not credible that that level of defects could only have arisen after the 2HA was entered into.

162. Third, ASC points to documents which are said to evidence Forgacs knowledge of the defects. Again, most of those documents were created in April 2013 or later. However, ASC also relies on the minutes of a Forgacs board meeting held on 19 October 2012, which record from a briefing by Mr Miller the following “key points”, among others:

A ‘bow wave’ of 200,000 man hours of work has built up against the original schedule;

…

Scheduling of the project is in chaos – examples sighted. ASC offered to send their master scheduler to Forgacs.

Forgacs senior management appear to have been in denial of the real and present problems with the project. It is apparent that the company has “over promised and under delivered” so far in the project. A turnaround of performance is required urgently!

…

DM expressed a view on why we are not getting the work done on time; (a) changes to design (est. 30% to 50%) of the problem; (b) Low efficiency – perhaps optimism in the original baseline costs; estimating errors; quality of work below acceptable standard in some cases.

163. Fourth, ASC submits that, to the extent that Forgacs was unaware of problems in the quality of its work during the period when the representations were made, it was under a contractual obligation to undertake proper inspection and testing of its work and had it done so it would have been aware of the problems.

164. Finally, ASC points to other problems with the EVMS in 2012 that were known to Forgacs. One was the discrepancy in some of the data contained in the EVMS. The other was that Forgacs had a practice, referred to in internal Forgacs emails, of using a CPI of 1.0 in calculating the estimate to complete – that is, of assuming that all work done in the future would be done in accordance with the budget for that work.

165. In my opinion, ASC’s case that Forgacs engaged in misleading and deceptive conduct must fail. That is because, understood in context, each of the representations relied on by ASC was a representation about Forgacs’ performance, progress and CPI once the backlog of work had been entered into the EVMS. The representations were not to be understood as representations about those measures generally. It is plain from the context of the statements on which ASC relies that Forgacs was asserting that the EVMS Data understated its true performance, progress and CPI because unauthorised work was not included in the EVMS and therefore was not being included in measuring those matters. Forgacs was not asserting that those measures were inaccurate for other reasons. Similarly, Forgacs’ predictions that those measures would improve were predictions about the effect on those measures once the unaccounted for work was taken into account. They were not predictions about those measures unrelated to the accounting for unaccounted-for work.

166. Understood in that way, it is not seriously contested that the factual representations (the first and second representations) were true and that there were reasonable grounds for making the predictions (the third and fourth representations). Because of the way CPI was determined and the Payable Fee was calculated, if Forgacs had undertaken unaccounted-for work, CPI and the Payable Fee would be lower than they otherwise would have been if the work had been included and, other things being equal, it is to be expected that they would improve in the future once the unaccounted-for work had been taken into account.

167. It appears from the way in which ASC put its case in submission that its real complaint is that the documents it relies on overstated Forgacs’ performance and CPI because Forgacs failed principally to take account of time spent on rectifying defects. That case itself appears to have two limbs. One is that the actual CPI figures provided by Forgacs were overstated for that reason. The second is that predictions about improvements in CPI were unreasonable for that reason.

163. Put like that, there are two problems with ASC’s case. One is that that is not how the case is pleaded. It is not, for example, pleaded that Forgacs engaged in misleading and deceptive conduct by including in its monthly reports figures for CPI and SPI which were false in the sense that had those figures been calculated based on complete and accurate data, they would have been lower. That, it seems to me, would raise a completely different case to the pleaded one; and one issue it would raise is whether, by providing the CPI and SPI data obtained from the EVMS, Forgacs was representing to ASC that those figures were objectively accurate or was simply representing that those figures were the ones produced by the EVMS.

164. The second problem is that there is no direct evidence that the level of defects that subsequently emerged existed at the time that the 2HA was entered into. ASC attempted to deal with this problem by submitting that the Court should infer that the level of defects was similar at the time the 2HA was entered into to what they later turned out to be; and that consequently it can be inferred that CPI and SPI, if correctly calculated, were also lower. However, that inference could only be drawn if the Court could be satisfied that there had been no material changes in the intervening period. That is not something which is addressed in ASC’s submissions.

Reliance

170. ASC submits that its reliance case is established in two ways. First, it submits that had Mr Cuthill known that the representations were false, he would not have recommended the 2HA to his superiors and consequently it would not have gone to the board of ASC for approval. Second, ASC submits that the material relied on by the board was based on financial modelling prepared by Mr Cuthill. That modelling was prepared on the assumption that CPI would increase, not decrease. ASC submits that had that modelling been different, the board would not have approved the 2HA.

171. ASC also places some reliance on the approval of the 2HA by the AWD Alliance board, although why that was relevant was not made clear. The AWD Alliance was not a party to the 2HA. It is not alleged that the AWD Alliance was misled and ASC is a person who suffered damage as a consequence of that conduct; and it is not alleged that the ASC board somehow or another relied on the AWD Alliance board. Consequently, that part of ASC’s case can be put to one side.

172. At the heart of ASC’s case is the modelling undertaken by Mr Cuthill. Mr Cuthill gives evidence that from April 2012, he, in conjunction with Mr Carel Boshoff, the Financial Controller for Shipbuilding, undertook extensive modelling of the fee structure proposed by Forgacs (which was incorporated into the 2HA). That modelling involved a comparison of the likely fee payable to Forgacs under the proposed 2HA with the likely fee payable to Forgacs under the Original Contract. In undertaking that modelling, Mr Cuthill says that he and Mr Boshoff originally considered the financial outcomes for ASC over various scenarios with a CPI ranging between 0.80 and 0.88. Later, they used a range for CPI of between 0.845 and 0.9232. Mr Cuthill gives evidence that if the CPI had been considerably less than that reported to ASC at the time (0.845), he would have prepared models assuming lower CPIs and would not have recommended the 2HA to his management.

173. In my opinion, there are a number of difficulties with ASC case on reliance.

174. The case does not focus clearly on what the relevant counterfactual ought to be. If Forgacs had not engaged in the pleaded conduct, then presumably it would have made no statements about the expected CPI in the future (as appears to be the case after June 2012) and it would have made no comments about the accuracy or otherwise of the CPI figures that it provided to ASC. But if that is what it had done, it is far from clear that Mr Cuthill would have acted any differently. The likelihood is that he would still have used the actual CPI figures that were included in the documents provided to him.

175. As I have said, ASC’s real complaint appears to be that it was entitled to rely on the figures provided to it in connection with the negotiations of the 2HA as being accurate or, at least as not overstating Forgacs’ true performance. I have already indicated the difficulties with that case. However, even if ASC is entitled to put its case in that way and even assuming that the figures that Forgacs provided to ASC were inaccurate because they failed to take account of the work necessary to remedy defects, there are still difficulties with ASC’s reliance case.

176. Insofar as it depends on Mr Cuthill, Mr Cuthill’s evidence is that if he had been aware that the figures had overstated Forgacs’ performance, he would have modelled the fees that ASC would have to pay with and without the 2HA using lower figures. But that still raises the question of what the correct figures were at the time. ASC has produced no evidence on that or the effect that the correct figures would have had on Mr Cuthill’s modelling. Moreover, there is a degree of unreality in a case that has as its counterfactual the correct CPIs when, to the knowledge of both parties, the EVMS was inaccurate and one of the purposes of the 2HA was to rectify that problem.

177. In addition, the decision to enter into the 2HA was taken by the board of ASC and there is no evidence of the relationship between that decision and Mr Cuthill’s recommendation. Mr Cuthill gives evidence that he would not have recommended to his management that ASC agree to the 2HA if his modelling had shown that ASC would be worse off financially under the new agreement. His management were Mr Simon Ridgway, who was the General Manager – AWD Production at the time, and Mr Martin Edwards, who was General Manager Current Operations – AWD Alliance. However, the recommendation to the ASC board to enter into the 2HA was made in a paper that was prepared by Mr Wallace and authorised by Mr Ludlam.

178. In the absence of evidence, it cannot be inferred that the question of the approval of the 2HA would not have come before the ASC board in the absence of a recommendation from Mr Cuthill or that, if it did, the board would not have approved the agreement. Without evidence concerning the processes by which decisions came before the ASC board, the most that could be inferred from Mr Cuthill’s evidence is that the paper he prepared for the purposes of the board meeting would have highlighted the disadvantages from ASC’s point of view of entering into the 2HA. However, the 2HA was intended to address a number of important issues, including the fact that neither party was complying with the existing agreement and the fact that ASC itself was exposed to possible claims under the Original Contract. It is not obvious that entry into it depended entirely on whether the expected fees that ASC would have to pay under it were greater or less than the expected fees under the Original Contract and it cannot be inferred that that factor would have been critical to Mr Wallace’s recommendation or the board’s decision.

Conclusion and orders

179. On the conclusions I have reached:

1. Clause 2.1 of the 2HA came into effect on 28 February 2013, which is the “Transition Date” for the purposes of the contract;

2. The 2HA was validly terminated by ASC on 7 June 2013;

3. Clause 6.1 of the 2HA does not affect the calculation of the amount payable in respect of the Payable Fee under the Original Contract and any amount paid or payable to Forgacs under clauses 2.1(a) and 2.1(b) during the period the 2HA was on foot are to be taken into account for the purposes of calculating the Payable Fee under the Original Contract;

4. ASC’s claim for liquidated damages was released by clause 6.1 of the 2HA;

5. Had it been necessary to determine the issue, I would have concluded that ASC’s claim based on s 18 of the ACL should fail.

180. I direct that the parties bring in Short Minutes of Order to give effect to this judgment within 14 days of today’s date. If there are any outstanding issues between the parties, or the parties are unable to reach agreement in relation to costs, the matter should be relisted by contacting my Associate to deal with those matters.

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Decision last updated: 20 August 2018