Kiewit Australia Pty Ltd v New Energy Corporation Pty Ltd
[2018] WASCA 180
•19 OCTOBER 2018
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
TITLE OF COURT : THE COURT OF APPEAL (WA)
CITATION: KIEWIT AUSTRALIA PTY LTD -v- NEW ENERGY CORPORATION PTY LTD [2018] WASCA 180
CORAM: BUSS P
MITCHELL JA
BEECH JA
HEARD: 6 SEPTEMBER 2018
DELIVERED : 19 OCTOBER 2018
FILE NO/S: CACV 111 of 2017
BETWEEN: KIEWIT AUSTRALIA PTY LTD
Appellant
AND
NEW ENERGY CORPORATION PTY LTD
Respondent
ON APPEAL FROM:
Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA
Coram: MASTER SANDERSON
File Number : COR 189 of 2017
Catchwords:
Corporations - Insolvency - Application to set aside statutory demand - Whether applicant established a genuine offsetting claim
Legislation:
Corporations Act 2001 (Cth), s 459H
Result:
Appeal dismissed
Category: B
Representation:
Counsel:
| Appellant | : | Mr P J Ward & Mr E J Sylwestrzak |
| Respondent | : | Mr M F Holler |
Solicitors:
| Appellant | : | Jones Day |
| Respondent | : | Trinix Lawyers |
Case(s) referred to in decision(s):
Britten‑Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601
Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304
Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5
Complete Hire and Sales Pty Ltd v Terrafirma Constructions Pty Ltd [No 2] [2018] WASCA 111
Global One Mobile Entertainment Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 134; [2012] ATPR 42‑419
Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132; (2014) 46 WAR 483
JUDGMENT OF THE COURT:
Introduction
The respondent, New Energy Corporation Pty Ltd (NEC) sought contractors to carry out planned waste-to-energy plant projects. The appellant, Kiewit Australia Pty Ltd (Kiewit) successfully submitted an expression of interest and entered into an early contractor involvement (ECI) contract with NEC as principal. Pursuant to the ECI, Kiewit conducted a front end engineering design (FEED) study and produced a report with a view to entering into an engineering, procurement and construction (EPC) contract. Thereafter, negotiations with respect to the terms of performance guarantees to be included in the EPC contract broke down.
The ECI contract provided for NEC to pay half of Kiewit's invoiced charges during the course of the contract and the remainder by the expiration of the agreement at latest.[1] NEC paid Kiewit $879,985.50 under the ECI contract. Kiewit contended that the balance (being the same amount) was due following the expiration of the ECI contract on 31 March 2015 and was unpaid.[2]
[1] Clause 4(3) of the ECI contract.
[2] See affidavit accompanying statutory demand (GAB 25 - 26).
Kiewit served a statutory demand on NEC in respect of the claimed outstanding balance for work carried out on the FEED study pursuant to the ECI contract. NEC applied to the master to set aside the statutory demand on the basis that it had an offsetting claim. The master granted that application on the basis that there was a serious question to be tried or a plausible contention that NEC had an offsetting claim based on misleading and deceptive conduct on the part of Kiewit.
Kiewit appeals the master's decision, essentially asserting that the evidence did not establish a genuine offsetting claim. For the reasons that follow, we are satisfied that it did, and so we would dismiss the appeal.
The evidence before the master
In early 2013, NEC was seeking to construct waste-to-energy facilities in East Rockingham and Port Hedland. The planned facilities would generate electricity from waste using the gasification technology of Entech Renewable Energy Solutions Pty Ltd (Entech), the global rights (excluding the Americas) to which were held by NEC[3]. Prospective financiers required that NEC enter into an EPC contract which contained what is referred to as 'full wrap' performance guarantees.[4]
[3] Affidavit of Jason Pugh sworn 3 August 2017 (Pugh affidavit) [6].
[4] Pugh affidavit [7]; primary decision [3].
In May 2013, NEC called for expressions of interest to enter into an EPC contract. The request for expression of interest letter (Request for EOI Letter) sent to Kiewit said, relevantly:[5]
[NEC] is seeking expressions of interest from suitably qualified EPC contractors to deliver their planned Waste to Energy facilities in Western Australia.
[NEC] has successfully obtained the Development and Environmental Approvals to progress their Boodarie Project 6km's south of Port Hedland and is currently pursuing the same for the East Rockingham project. As the Pilbara Region of WA expands exponentially waste and power infrastructure is urgently required therefore making Boodarie our lead project.
The Boodarie facility will be a first of its kind in Australia and with its remoteness and the challenges of a diverse waste feed stream [NEC] seek innovative companies willing to participate in these projects. The intent is for a partnering arrangement between [NEC] and the EPC such that other planned projects in the future can be delivered on the same or similar template.
The attached documents provide the background of the project/s, an overview of the preliminary design work undertaken to date and the scope of the work expected to form the basis of the EPC contract. (emphasis added)
[5] GAB 27, annexure JGP 3 to the Pugh affidavit.
In the letter, NEC also stated that it brought to the respondents' attention several matters including:[6]
•the Boodarie Project is located in the Pilbara region of Western Australia …
•[NEC] are seeking a contractor prepared to deliver the project as a 'full wrap' EPC …
[6] GAB 28.
Three documents were attached to the Request for EOI Letter. The first, entitled 'Request for Expression of Interest for an EPC Contractor' (Request for EOI Document), notes that NEC has decided to pursue two projects, one at East Rockingham (East Rockingham Project) and one at Boodarie near Port Hedland (Boodarie Project). However, the Boodarie Project was identified as the 'first priority',[7] and the remainder of the document sets out in detail the requirements and schedule for completion of the Boodarie Project. Two of the key general specifications for the Boodarie Project were a gasifier thermal capacity of 72 MW and a generation capacity of 18 MW.[8]
[7] GAB 34, annexure JGP 3 to the Pugh affidavit.
[8] GAB 44, annexure JGP 3 to the Pugh affidavit.
The Request for EOI Document also stated, in section 1.4, as follows: [9]
This Request for an Expression of Interest outlines the requirements to deliver the Boodarie Project however it should be noted that [NEC] is focused on the respondent delivering both projects.
The two projects are fundamentally of a similar size and build with the major notable difference that the East Rockingham project's rollout should be less demanding due to its location within the greater Perth metropolitan region and with less arduous climatic conditions.
[9] GAB 35.
Section 1.6 of the same document stated that this 'EOI is the first stage of a two stage process to appoint an EPC contractor to deliver the Project/s as outlined herein. The EOI process seeks to shortlist three companies that NEC is confident can deliver the Project/s …'[10] Further, it was said that '[s]tage two will be NEC entering into negotiations with the shortlisted companies on the basis of selecting one to become involved in an ECI works phase to develop the project to a bankable stage and financial close'.[11]
[10] GAB 36.
[11] GAB 36.
'Project' was defined to mean either of the two projects referred to in the document.[12]
[12] GAB 38.
There follows, in section 4, a detailed outline of the proposed facility, including its design criteria, and equipment overview, a building overview, statements of on and off site services and operating philosophy. These were expressed in relation to the Boodarie Project. A high level flow sheet and proposed layout for the Boodarie Project were noted in an appendix. It was said in section 4.1 that the East Rockingham Project is to be of a similar flow sheet and layout.[13]
[13] GAB 41.
As Kiewit's submissions emphasise, section 4.2.5 set out metrics that applied to the Boodarie Project. These included amounts of feedstock waste and data as to the waste calorific value of the waste being processed. However, it was also said that the gasification plant will be designed to cater to all waste calorific values and so would be designed to accept a maximum of 205,000 tonnes per annum of waste at what was the lowest of the specified calorific values, namely 10 MJ/kg calorific value.[14]
[14] GAB 45.
Section 6 of the Request for EOI Document concerned the proposed contract. By way of overview, section 6.1 stated that NEC sought a contractor to take on the project on a 'full wrap' EPC basis. It further stated that 'NEC's definition of "full wrap" is that the contractor will be responsible for all design, supply, construction, project management and any associated risks including process risk to deliver the project to full operation as outlined' in the Request for EOI Document. It also stated that to 'ensure the project is set up to minimise the risk to both NEC and the selected contractor the contractor is expected to participate in an Early Contractor Involvement stage whereby full visibility of contract scope and cost will provide the basis for final contract negotiations between the parties'.[15]
[15] Section 6.1, GAB 59.
Further, section 6.2 and section 6.3 provided as follows:
6.2 Basis
The proposed contract shall be based on AS4902 - General Conditions of Contract for Design and Construct. The project procurement method under this standard would be a 'design development and construct'. It is planned that the current preliminary design would be subject to further design development as part of the proposed ECI stage and it would be the design at the completion of ECI that would form the basis of the contract.
NEC's key drivers for this contract:
•A fixed price covering all aspects of delivering an operational facility.
•A partnership with the EPC where both parties are fully committed to delivering the desired outcomes.
•An open book arrangement on all costs to the project such that financial commitments are made in the best interest of the project and result in a win-win for both parties.
•An EPC that will consider potential equity in the project.
•An ECI stage that develops and optimises project design, delivery and cost to the point where all parties are committed to delivering the project on that basis.
6.3 Risk Mitigation
The following risk mitigation overview is provided by NEC as a basis for developing a workable and financially acceptable approach to risk as part of the ECI. NEC's approach is based on:
•A partnership strategy where risk is understood and visible to all parties.
•A risk management strategy where risk is apportioned to the party in the best position to accept and manage the specific risk.
A key aspect of the proposed ECI stage is to:
•Undertake formal risk reviews on all aspects of the project i.e. commercial, technical, delivery, constructability and operational.
•Prepare a project risk mitigation plan jointly with NEC that is workable for both NEC and the EPC and acceptable to stakeholder and financier requirements.
•Where required have specific plans for all critical risks; specifically those that are the responsibility of either the EPC or NEC and as such need to be managed in house.
NEC considers the project risk manageable by ensuring it is apportioned to the party in the best position to accept and manage the specific risk. On this basis the associated risks with various packages can be delegated as follows:
•Buildings
•MRF
•Blending and gasifier feed
•Gasification
o Process design
o Equipment design
o Equipment fabrication
o Commissioning and startup
•Boiler
•Air quality control system - DSI and FFB
•Steam turbine including condensate handling
•Water treatment
The above list is not considered complete and is indicative only.
In June 2013, Kiewit responded to the Request for EOI Letter. Consistently with what was said in the Request for EOI Letter and the Request for EOI Document, Kiewit framed its response in terms of the Boodarie Project.[16]
[16] GAB 74, annexure JGP 4 to the Pugh affidavit.
On 28 October 2013, Kiewit conducted a presentation for NEC, which included a slide, noting that it would provide 'EPC WRAP with Performance Guarantees'.[17]
[17] GAB 156, annexure JGP 5 to the Pugh affidavit; primary decision [4]; see also GAB 13 ‑ 14, Pugh affidavit [14] ‑ [15].
On 15 April 2014, the parties entered into an ECI contract pursuant to which Kiewit was to provide a FEED report for the East Rockingham Project.[18] The scope of services included, relevantly:[19]
Develop the Front End Engineering Design (FEED) for Waste‑to‑Energy facilities, based on the ENTECH gasifier technology and the waste feed intake data provided. The facility to be the subject of this FEED is the Principal's East Rockingham project located in Western Australia (Facility). …
The basis of the design should be the Entech Preliminary Design Package and subsequent Entech and Principal documentation as supplied to the Contractor …
EPC Contract: Based on the result of the FEED study, and with the confirmation of the Principal, the Principal will develop an Engineering Procurement Construction and Commissioning contract (EPC contract) allowing for the development of the Facility to a fully operational state.
[18] GAB 157 - 182, annexure JGP 7 to the Pugh affidavit.
[19] GAB 170.
The ECI contract provided in attachment A, under 'Scope of Services' that the EPC contract to be developed would include 'Performance Guarantees'.[20]
[20] GAB 170, annexure JGP 7 to the Pugh affidavit; primary decision [4]; see also GAB 13 ‑ 14, Pugh affidavit [14] ‑ [15].
It can immediately be seen that this ECI contract relates to the East Rockingham Project,[21] not to the Boodarie Project.
[21] See, for example, GAB 170.
Mr Pugh's third affidavit explained that after the EOI request, NEC decided to base the project design on the East Rockingham Project, instead of Boodarie. As a result, NEC based the ECI phase on the East Rockingham Project, and the ECI contract was for a FEED study into the East Rockingham Project.[22]
[22] GAB 659, affidavit of Jason Pugh sworn 29 September 2017 (third Pugh affidavit) [9].
In the scope of services section of the ECI contract, it was noted that '[w]hile not mandatory the Contractor should consider and take into account that any design for the East Rockingham facility may be applied to the Boodarie facility at a later date'.[23]
[23] GAB 170.
Mr Pugh's evidence was that Kiewit's representation that it would provide a 'full wrap' was a major factor in NEC's decision to award the ECI contract to Kiewit and without it, NEC would have chosen one of the many other shortlisted contenders.[24]
[24] GAB 15 ‑ 16, Pugh affidavit [16] - [17], [20].
In July 2014, Kiewit obtained a due diligence report on the technology associated with the East Rockingham Project.[25]
[25] GAB 16, Pugh affidavit [21].
NEC adduced evidence of various communications from March 2014 through to March 2015 by which it contends that Kiewit represented, or continued to represent, in effect, that it would provide a 'full wrap' guarantee.[26] For example, at a presentation to local government representatives on 25 March 2015, an officer of Kiewit said that Kiewit would have total responsibility for, and would underwrite, the project delivery and performance.[27] All of these communications were, of course, directed to the East Rockingham Project.
[26] GAB 335 - 339; annexures JGP 13 - 18 of the affidavit of Jason Pugh sworn 7 September 2017 (second Pugh affidavit).
[27] GAB 338, 410, 417.
On 20 April 2015, the appellant presented the respondent with a FEED report entitled 'New Energy Corporation East Rockingham WtE Facility FEED Report' (FEED Report).[28] The FEED Report included a statement that '[a]s both of [NEC's] proposed facilities are rated for 72 MWt output there is expected to be a high degree of portability of the design between the two projects. While this was understood, the focus of this FEED was very much on the East Rockingham Project and the known available waste streams'.[29] As Kiewit's submissions emphasise, one of the bases for the design, for the purposes of the FEED, was the waste tonnages and composition of the feedstock data.[30] Kiewit's FEED Report referred to the seven scenarios of different waste streams produced in a FEED report prepared by Entech.[31]
[28] GAB 210 - 262, annexure JGP 9 to the Pugh affidavit; primary decision [5].
[29] GAB 214.
[30] Appeal ts 5.
[31] GAB 220 ‑ 221.
On 20 July 2015, NEC signed a 20‑year waste services contract with the City of Karratha.[32] As a result, following completion of the FEED Report, NEC decided to proceed with a plant at Boodarie first. However, NEC determined that the plant size of the project at Boodarie should be downsized to 36 MW thermal capacity and 9 MW electrical capacity (Revised Boodarie Project). Both the East Rockingham Project and the original Boodarie Project had been of a scale twice that, namely 72 MW thermal capacity and 18 MW electrical generation capacity. The reduction in scale was achieved by reducing the number of gasifier units.[33]
[32] GAB 660, third Pugh affidavit [10].
[33] GAB 660, third Pugh affidavit [10].
On 26 October 2015, NEC provided Kiewit with a draft 'EPC Contract Term Sheet' (Draft Term Sheet) for the 'Boodarie Waste to Energy Facility'.[34] As we have said, this proposed project had scaled down by half both the thermal energy generation capacity (to 36 MW) and the electricity generation capacity (to 9 MW).[35] The introduction to the Draft Term Sheet provided that the Draft Term Sheet was to 'serve as a basis for negotiating and drafting a definitive contract for the engineering, procurement and construction of the Project between the Contractor and Owner'.[36] It further stated that the Draft Term Sheet is 'a work in progress and non‑binding document at this time allowing both parties to contribute such that a contract can be drawn up that reflects the intent of both parties in delivering the Project'.[37] The proposed terms of the Revised Boodarie Project provided for performance guarantees which included the following:[38]
[34] GAB 263, annexure JGP 10 to the Pugh affidavit.
[35] GAB 267, annexure JGP 10 to the Pugh affidavit.
[36] GAB 267, annexure JGP 10 to the Pugh affidavit.
[37] GAB 267, annexure JGP 10 to the Pugh affidavit.
[38] GAB 290, annexure JGP 10 to the Pugh affidavit.
Performance Test
Threshold Performances
Guaranteed Performances
Maximum Deviation
Performance Damages
PG1
Materials Recovery Facility
PG1.1
The MRF shall demonstrate a continuous throughput of at least 90% of Nominal Throughput Capacity
The MRF shall demonstrate a continuous throughput at or above the Nominal Throughput Capacity
-10%
$xxx,xxx for each tonne per hour reduction in waste throughput below the Guaranteed Performance Value
PG 1.2
The average recovery rate of metal material shall exceed 70% of the Nominal Throughput Capacity
The average recovery rate of metal material shall exceed 80% of the Nominal Throughput Capacity
Not applicable
PG1.3
The average recovery rate of inert material, including sand, soil, rubble, glass etc shall exceed 70% of the Nominal Throughput Capacity
The average recovery rate of inert material including sand, soil, rubble, glass etc shall exceed 80% of the Nominal Throughput Capacity
Not applicable
PG2
Waste Throughput and Thermal Capacity
PG 2.1
Each process stream shall demonstrate a continuous throughput of at least 90% of Nominal Thermal Input Capacity
Each process stream shall demonstrate a continuous throughput at or above the Nominal Thermal Input Capacity
-10%
$x,xxx,xxx for each tonne per hour reduction in WDF throughput below the Guaranteed Performance at the Design Point on the Combustion Diagram. Damages adjusted pro rata to reflect actual operating conditions at the time of the test in accordance with the above Combustion Diagram
PG 2.2
Each stream shall operate at all points on or within the Performance Envelope without consumption of auxiliary fuel
$x,xxx,xxx for each 1MWh of auxiliary fuel (based on lower heating value) by which auxiliary fuel consumption is greater than zero
In response, by an email dated 29 November 2015, Kiewit sent NEC a marked-up copy of the Draft Term Sheet, stating, among other things, that the throughput performance guarantees provided for in Table 1 of Appendix A of the Draft Term Sheet and set out in the preceding paragraph were 'owner nominated item[s] for which EPC contractor will not provide any PG [performance guarantee]'.[39]
[39] GAB 324, annexure JGP 11 to the Pugh affidavit.
On 1 December 2015, Mr Lloyd, of NEC, sent an email to officers of Kiewit.[40] The email stated that Kiewit's comment set out immediately above 'goes against the long held position and understanding with Kiewit that [NEC] engaged Kiewit as an EPC contractor that is prepared to provide performance guarantees across the entire processing facility'. NEC set out its understanding and position as follows:[41]
•PG1.1 - MRF Throughput - While [NEC] expect Kiewit to provide the throughput guarantee no matter who is providing the MRF the selection of the MRF supplier was a joint decision between Kiewit and NE. NE expressed a view that we would like to sole source the MRF and this was agreed by Kiewit. At no time was this linked to not providing a guarantee; in fact much time was spent during the FEED discussing performance with the nominated MRF supplier to ensure appropriate back to back guarantees would be in place to protect Kiewit.
•PG2.1 - Gasifier Throughput - [NEC] have been clear from the day we issued our Request for EOI in relation to engaging an EPC contractor to undertake a FEED and subsequently build our facility that the technology to be deployed would be the Entech gasification technology. At no time since engaging Kiewit has it been suggested that Kiewit 'will not provide any PG' and in fact there has been many hours invested by Kiewit, Entech and [NEC] and ensure that Kiewit is comfortable with the technology and prepared to move forward.
[40] GAB 461, annexure JGP 23 to second Pugh Affidavit.
[41] GAB 461.
The email concluded by saying these two points were considered to be 'show stoppers' by NEC and requested that Kiewit confirm or clarify its position immediately.
In an email dated 29 January 2016, Kiewit sent NEC an updated marked-up copy of the Draft Term Sheet. Commenting on the heading 'Appendix A - Performance and Availability Criteria', Kiewit said 'Kiewit will provide performance guarantees on a back to back basis with Sole Source providers Entech and MRF'.[42] In respect of the same two throughput performance guarantees in Table 1 of Appendix A the subject of the 29 November 2015 email, Kiewit commented '[a]s this is a sole source item, Kiewit will pass on to NEC on a back to back basis the PG Kiewit receives from the supplier'.[43]
[42] GAB 451, annexure JGP 23 to second Pugh affidavit.
[43] GAB 452, annexure JGP to the second Pugh affidavit.
By email of 28 July 2016, Mr Lloyd, of NEC, wrote to an officer of Kiewit by email.[44] As Kiewit's submissions relied heavily on the contents of the email, we set it out in full. The email read as follows:
[44] GAB 422, annexure JGP 23 to second Pugh affidavit.
Hi Frank
Thanks for your time this afternoon, I felt it was a very productive meeting.
Please find attached the draft EPC contract we discussed which will hopefully provide Kiewit with a greater understanding of the T&Cs required by our funders to get the project over the line. The schedules aren't complete at this stage as over 50% require drafting/input from the contractor and the others will come out of the FEED/ECI we wish to undertake specifically for Port Hedland. The Performance Guarantee (PG) aspects of the schedules we expect to be in line with those in the term sheet attached. I have included a couple of emails that give you an insight into how we have got to today in regards to the term sheet and specifically the PGs.
We believe there is enough in this draft contract, when combined with the work already undertaken, for Kiewit to prepare a response that includes the following:
•Kiewit's plan to deliver the project, including:
o A schedule of tasks up to FC
o Manning and costs to complete a FEED for the Boodarie facility
o A draft plan for delivering the project post FC
•Mitigation plan of any risks to satisfy our funders including technology selection, performance guarantees, parent company guarantees etc
•A marked up copy of the contract
•Expected indirect project costs over and above direct capital costs ie equipment, materials and installation and including proposed margins, contingencies and risk allowances.
One thing we didn't discuss which is touched upon in some of the attached correspondence is the Materials Recovery Facility (MRF). While we did state during the FEED that this was to be supplied by Instant Waste Management this was only done with Kiewit's approval and at no time did we expect Kiewit to offer anything but a full guarantee. If Kiewit are unable to obtain a back to back agreement to their satisfaction then it is over to Kiewit to find a contractor that will build the MRF and provide the required PG's.
New Energy are keen to move this forward and to that end I would like to suggest that we meet at the earliest to go over the above, get you up to speed on gasification J and how we can jointly get this project to FC. Enjoy Kal and looking forward to catching up upon your return.[45]
[45] GAB 422.
Further issues as to the 'full wrap' question were ventilated at a meeting on 22 August 2016.[46] Mr Lloyd was telephoned, and then participated by telephone in the meeting on behalf of NEC.
[46] GAB 558 - 559, affidavit of Vincenzo Gullotti [7].
On 1 September 2016, Mr Lloyd evidently met with Mr Frank Penna of Kiewit. Following the meeting, Mr Lloyd sent Mr Penna an email in the following terms: [47]
Hi Frank
Thanks for your time this morning to discuss the performance guarantees (PGs) for our upcoming
and willingness to offer PGs for the project are linked to the PGs provided by Entech. To clarify the Entech PGs I offered to provide a clear outline of what can be expected from Entech. To this end please
ups of the Kiewit T&Cs. I have also attached a clarification email that was exchanged post the proposal submission.
I would bring your attention to Section 7.0 in the Entech proposal which discusses their PGs. My reading of this proposal indicates that Entech have offered the PGs expected by [NEC] and the funders in the previously supplied EPC term sheet thereby from a technical perspective providing Kiewit a back to back arrangement. However, in relation to the Security of Sellers Performance as referred to in Section 12 of
Therefore my query to Kiewit is if Entech were able and willing to provide the 100% security requested would Kiewit provide the performance guarantees as laid out in the EPC term sheet? And would these still be subject to a liability cap and if so what parts of the plant would be covered or not by this lability [sic] cap? And what would the value of this cap be?
During the FEED there were discussions re the PGs and a possible requirement for Kiewit to bridge the gap between the Entech security offered and that required. Is this still an option open for discussion?
As we discussed the structure of the gasifier supply package and how it was split up is complicated but this was agreed mutually between Kiewit, [NEC] and Entech during the early stages of the FEED to mitigate risk in the overall delivery of the package. Should this structure require revisiting then we are willing to open this up again if it resolves these issues around the PGs. (original emphasis)
[47] GAB 572, annexure SR 3 to the affidavit of Sujit Chowdhury (Chowdhury affidavit). There appears to be some lines missing from the text of the email, but nothing turns on this.
Kiewit did not reply to Mr Lloyd's email of 1 September 2016.[48]
[48] GAB 662, third Pugh affidavit [16].
On 23 February 2017, Mr Chowdhury, of Kiewit, had a conversation with Mr Lloyd of NEC. Mr Chowdhury's evidence was that the email he sent to Mr Cotton of Kiewit the following day reflected the substance of the matters discussed.[49] The email includes matters to the following effect:[50]
1.NEC had moved on from Entech and partnered with a new technology provider.
2.Mr Lloyd said he was no longer with NEC full time.
3.Mr Lloyd said he had been told there was likely to be some funds flowing to NEC soon and that NEC was still committed to paying Kiewit. However, Mr Lloyd said that the funds flow issue had been said to be there for a few weeks now and was moving from one week to the next.
4.Mr Chowdhury said that Kiewit had put in writing to NEC that should they agree to go to a different technology provider, Kiewit would most likely provide the guarantees NEC or their financiers were looking for.
[49] GAB 564 ‑ 565, Chowdhury affidavit [9].
[50] GAB 655, annexure SR 5 to Chowdhury affidavit.
On 14 July 2017, Kiewit served on NEC a statutory demand seeking the payment of $879,985.50, which it claimed was due and owing as payment pursuant to the ECI for the East Rockingham FEED project.[51]
[51] GAB 22 - 23.
Primary decision
The master set out the background of the dispute as follows:[52]
The relevant facts can be summarised as follows. In early 2013, [NEC] was seeking to construct waste to energy facilities in East Rockingham and Port Hedland. The aim was to process waste to generate electricity using proprietary gasification technology, the global rights to which were held by [NEC]. [NEC] required funding from financiers to construct the projects. To obtain that finance it had to have what is described as an 'EPC contract'. That is, an engineering procurement and construction contract. [NEC] says contained within the EPC contract there had to be certain performance guarantees. These performance guarantees are described as a 'full wrap'. An EPC contract with a full wrap made the projects bankable.
[NEC] called for expressions of interest. [Kiewit], among others, responded. [Kiewit] was selected to conduct a presentation to [NEC]. It is [NEC's] case during the presentation [Kiewit] produced a slide which highlighted as one of the key benefits to [NEC] that [Kiewit] would provide 'EPC wrap with performance guarantees'. Subsequent to the presentation, the parties entered into negotiations with a view to entering an early contractor involvement contract (ECI contract) to conduct the FEED study. This ECI contract was to be a precursor to the EPC contract. The ECI contract in attachment A under 'Scope of Services' said the EPC contract would provide 'performance guarantees'.
[52] Primary decision [3] - [4].
The master noted that following the completion of the FEED Report on 20 April 2015, NEC presented Kiewit with the Draft Term Sheet for an EPC contract, which the master said 'included the full wrap requirement which [NEC] says was always to be included in the final EPC contract'.[53] The master then stated that '[a]t that point the defendant indicated it would not be providing the full wrap'. That appears to be a reference to Kiewit's email of 29 November 2015.
[53] Primary decision [5].
The master then noted NEC's contentions that, as a consequence of Kiewit not providing the 'full wrap' which it had represented that it would provide:[54]
•NEC could not enter into an EPC contract;
•NEC could not afford to restart the process using Entech technology; and
•The East Rockingham Project would not go ahead and the FEED Report received under the ECI contract was worthless.
NEC has paid Kiewit $879,985.50 under the ECI contract and it would seek to recover that amount.[55]
[54] Primary decision [5].
[55] Primary decision [5].
The master noted that NEC claimed Kiewit had engaged in misleading and deceptive conduct, as a consequence of which NEC had an offsetting claim equal to, or greater than, the amount claimed in the statutory demand.[56] The master observed that it was a 'low threshold' for NEC to establish that there was a serious question to be tried or a plausible contention which requires examination in order to set aside the statutory demand.[57] The master found that that threshold had been met on the basis that it is arguable that '[NEC] entered into that [ECI] contract based upon representations made by [Kiewit] prior to the contract being signed'.[58] In support of that finding, the master:[59]
(a)noted that section 6.1 of the Request for EOI Document sought a contractor on a 'full wrap' basis; and
(b)found that the affidavit of Mr Pugh sworn 3 August 2017 must be accepted. Consequently, it could not be concluded that because the issue of misleading and deceptive conduct was not raised in discussions between the parties in relation to payment of Kiewit's accounts, there is no substance to NEC's claims.
[56] Primary decision [6].
[57] Primary decision [6].
[58] Primary decision [7]
[59] Primary decision [6] - [8].
The master was of the view that the sworn evidence of Mr Pugh was not fanciful and must be accepted for the purpose of the application, even though, based on affidavits submitted on behalf of Kiewit, the master was satisfied that '[i]t is clear that the issue of the alleged misleading and deceptive conduct was never raised by [NEC] in discussions between [NEC] and [Kiewit] in relation to payment of [Kiewit's] accounts'.[60]
[60] Primary decision [8].
Further, the master concluded that Kiewit's contention that the back-to-back performance guarantees it was prepared to offer were, in substance, equivalent to the 'full wrap' was not an answer to NEC's claim.[61]
[61] Primary decision [9].
Grounds of appeal
The two grounds of appeal may be summarised as follows:
(1)The master erred in fact and law in finding that there was a genuine dispute as to the debt claimed in Kiewit's statutory demand on the basis that NEC had an arguable offsetting claim for damages for misleading and deceptive conduct; and
(2)Further, or in the alternative to Ground 1, the master erred in fact and law in failing to find that there was no genuine dispute or offsetting claim because Kiewit and its supplier, Entech, had in substance provided 'full wrap' performance guarantees, by agreeing to provide certain performance guarantees back-to-back.
Submissions
In support of ground 1, Kiewit submits that NEC's alleged offsetting claim for damages for misleading and deceptive conduct suffers from at least three distinct flaws, each of which is fatal, concerning:
1.the content of the 'full wrap' representation;
2.whether Kiewit actually refused to guarantee required performance pursuant to the 'full wrap'; and
3.causation of loss.
The three alleged flaws are developed in the following manner.
1.Any representation must be viewed in its context.[62] Part of the context of NEC's definition of 'full wrap' in section 6.1 of the Request for EOI Document was a reference to early contractor involvement stage. Further, section 6.2 stated that the design at the completion of the ECI would form the basis of the contract. Consequently, it is clear that the 'full wrap' representation made by Kiewit was that it would provide a 'full wrap' with performance guarantees in an EPC contract for a plant that it had designed.[63] That was not true of Kiewit's alleged refusal to provide a 'full wrap', since Kiewit had not designed a plant for the Revised Boodarie Project.
2.Kiewit's alleged refusal to guarantee performance related to a level of throughput performance that was completely unspecified by NEC.[64]
3.NEC led no evidence to demonstrate an arguable causal link between the alleged failure to provide a 'full wrap' for the Revised Boodarie Project and the alleged wasted expenditure concerning the East Rockingham Project.[65] The text of Mr Pugh's affidavit was expressed in general terms which avoided specifying which project was dealt with in the various stages of the process. The court was not bound to accept the imprecise assertions of Mr Pugh, as they were inconsistent with the undisputed contemporaneous documentary evidence.[66]
[62] Appellant's submissions [10] citing Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 [102].
[63] Appellant's submissions [11]; appeal ts 4 ‑ 12.
[64] Appellant's submissions [12].
[65] Appellant's submissions [13].
[66] Appellant's submissions [14]; appeal ts 14 ‑ 20.
Kiewit's submissions as to ground 2 are to the following effect:
1.The evidence as to the events after 29 November 2015 demonstrate that NEC did not prove an arguable case that Kiewit's refusal of 29 November 2015 caused loss to NEC.[67]
2.After 28 January 2016, there was no substantive effort by NEC to progress agreement on the EPC term sheet until the meeting on 22 August 2016.[68]
3.The effect of Mr Lloyd's email of 1 September 2016 is that Mr Lloyd, on behalf of NEC, acknowledged that the performance guarantee offered by Kiewit satisfied NEC's financiers.[69] Consequently, the master should not have accepted Mr Pugh's mere assertions to the contrary in his affidavit.[70]
[67] Appellant's submissions [17]; appeal ts 12, 23.
[68] Appellant's submissions [19].
[69] Appellant's submissions [20] - [21]; appeal ts 21.
[70] Appellant's submissions [21] - [23].
Disposition
General principles
Under s 459H of the Corporations Act 2001 (Cth), the court may set aside a statutory demand where either:
(a)there is a genuine dispute about the existence of a debt to which the statutory demand relates; or
(b)the company served with the statutory demand has an offsetting claim.
An offsetting claim is defined to mean a genuine claim that the company has against the respondent.[71]
[71] Section 459H(5).
The relevant legal principles are not in dispute. The following principles concerning offsetting claims under s 459H are well established:[72]
(1)The onus is on the recipient of the statutory demand to establish the offsetting claim.
(2)The expression 'genuine claim' connotes a plausible contention requiring investigation and raises similar considerations as 'the serious question to be tried' criterion on an interlocutory injunction.
(3)Rather than deciding the merits of the alleged claim, the court examines whether there is a genuine claim sufficiently quantified to give rise to an offsetting amount. The court must identify the alleged claim which must 'be bona fide and truly exist in fact', and assess whether it is a genuine claim. If such a claim is raised, the court does not attempt to resolve the claim or predict its outcome.
(4)The demand must be set aside or varied if there is a genuine claim which is not based on spurious, hypothetical, illusory or misconceived grounds.
(5)This does not mean that the court must accept uncritically as giving rise to a genuine dispute, or a genuine claim, every statement in an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent or inherently improbable in itself. Nor does it require the acceptance of a 'patently feeble legal argument' or 'matters of fact unsupported by evidence'.
(6)A company seeking to set aside or reduce a statutory demand on the basis of an offsetting claim does not need to set out evidence supporting the amount of the claim in meticulous detail. It is enough that the company provides evidence of a plausible and coherent basis for quantifying the claim which it genuinely asserts, or showing that the claim exceeds the amount of the debt demanded. Precise quantification is unnecessary.
[72] See, for example, Central City Pty Ltd v Montevento Holdings Pty Ltd [2011] WASCA 5 [9] ‑ [16]; Britten‑Norman Pty Ltd v Analysis & Technology Australia Pty Ltd [2013] NSWCA 344; (2013) 85 NSWLR 601 [30] ‑ [31], [46] ‑ [53]; Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 3] [2014] WASCA 132; (2014) 46 WAR 483 [69]; Complete Hire and Sales Pty Ltd v Terrafirma Constructions Pty Ltd [No 2] [2018] WASCA 111 [13] ‑ [18].
The third of these points is of fundamental importance. In conducting the exercise required by s 459H, the court must keep squarely in mind that its task is the determination of whether a genuine claim exists in fact, and, if so, its amount, rather than resolving the offsetting claim, or attempting to predict its outcome.
In our opinion, when these principles are applied to the evidence before the master, no error is revealed in the master's conclusion. NEC established that it had a genuine claim in an amount not less than the amount the subject of the statutory demand.
NEC's claim
NEC's claim involves the following steps:
1.Prospective financiers required that NEC enter into an EPC contract which contained a 'full wrap' performance guarantee.[73]
2.Kiewit made a representation that it would give a 'full wrap' guarantee on the terms set out in [61].
3.In awarding the ECI contract to Kiewit, NEC relied on Kiewit's representation in that respect and, but for that representation, would not have done so.[74]
4.The effect of Kiewit's emails of 29 November 2015 and 29 January 2016 was that it refused to give 'full wrap' performance guarantees.[75] As a result, NEC could not obtain finance for the project involving an EPC contract with Kiewit.[76]
5.That meant that NEC could not proceed with the project using the Entech technology because it could not afford another two years to redo the process involving a new contractor undertaking an ECI with a view to providing the required 'full wrap'.[77] Thus NEC had to abandon the use of the Entech technology and instead appoint an EPC contractor who could provide their own waste to energy technology, and thus be able to immediately provide the required 'full wrap'.[78] Consequently, the money spent on paying Kiewit for the FEED Report concerning the East Rockingham Project was wasted.[79]
6.The damages NEC has suffered are not less than the amounts paid and payable under the ECI contract.
[73] GAB 11, Pugh affidavit [7].
[74] GAB 15 ‑ 16, Pugh affidavit [16] ‑ [17], [20].
[75] GAB 18, Pugh affidavit [26] ‑ [27], GAB 343, second Pugh affidavit [14].
[76] GAB 19, Pugh affidavit [30].
[77] GAB 19, Pugh affidavit [31]; GAB 346, second Pugh affidavit [21].
[78] GAB 19, Pugh affidavit [31].
[79] GAB 346, second Pugh affidavit [21].
Kiewit's submissions that this is not a genuine claim cannot be accepted. That is because, in essence, although those submissions raise matters which may well create obstacles for the success of NEC's claim, that does not mean that NEC has no genuine offsetting claim.
Ground 1: alleged fatal flaws in NEC's claim
We begin with ground 1. We will deal in turn with each of the three flaws in NEC's claim alleged by Kiewit to exist, as summarised in [46] above.
Alleged limitation in the representation
First, Kiewit contends that any representation that it would provide a 'full wrap' could have related only to an EPC contract for a plant that it had designed. In our opinion, for the reasons that follow, NEC's claim cannot be dismissed as spurious, or not genuine, on this basis.
Whether conduct is misleading or deceptive is a question of fact, to be determined objectively in light of all the surrounding facts and circumstances.[80]
[80] Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 [109]; Campbell v Backoffice [102]; Global One Mobile Entertainment Pty Ltd v Australian Competition and Consumer Commission [2012] FCAFC 134; [2012] ATPR 42‑419 [108].
From the outset, NEC's request for an EOI contemplated two projects being developed by NEC, of similar size and build, with similar flow sheets and layouts, both of which were to be delivered by the chosen EPC contractor.[81] The portability of design between the two projects was referred to in several of the relevant documents, including the Request for EOI Document,[82] the ECI contract,[83] and the FEED Report.[84] The Boodarie Project (in its original conception) and the East Rockingham Project were of the same scale. The Revised Boodarie Project was half the scale, reflecting a simple reduction in the number of gasifier units from five to three.[85]
[81] See [5], [7], [8] and [11] above.
[82] See [8] and [11] above.
[83] See [21] above.
[84] See [25] above.
[85] In each case, one gasifier unit being an in‑place spare: third Pugh affidavit [10].
When it responded to NEC's request or demand for a 'full wrap' performance guarantee, in its emails of 29 November 2015 and 29 January 2016, Kiewit did not point to the fact that the proposed EPC contract contemplated in the Draft Term Sheet related to the scaled down Revised Boodarie Project, and not the East Rockingham Project, as a reason that it could not, or would not, provide a 'full wrap' performance guarantee.
On the evidence, it cannot be concluded, so as to preclude a plausible contention to the contrary, that the differences between the Boodarie Project, the East Rockingham Project and the Revised Boodarie Project are so significant that:
(1)a statement made by a party in respect of one project does not convey substantially the same impression in relation to the other projects; or
(2)the design work done by Kiewit in relation to one project does not equip it with sufficient knowledge of other projects to enable it to provide performance guarantees corresponding to those that, on NEC's case, Kiewit had earlier foreshadowed.
NEC established a plausible contention requiring investigation that, by its conduct from June 2013 to October 2015, Kiewit represented, or conveyed the impression, to NEC that Kiewit would provide a 'full wrap' performance guarantee as an element of an EPC contract relating to the Boodarie Project or the East Rockingham Project, or a project that arose or resulted from a FEED study.
NEC also established a plausible contention requiring investigation that the Revised Boodarie Project was sufficiently similar to the East Rockingham Project that the EPC for the Revised Boodarie Project could be said to have arisen from Kiewit's FEED Report concerning the East Rockingham Project. In so concluding, we do not overlook that, as Kiewit's submissions emphasise,[86] in his email of 28 July 2016, Mr Lloyd of NEC contemplated the undertaking of a FEED study specifically for Port Hedland.[87] That does not establish that the projects are so different that the Draft Term Sheet for the Revised Boodarie Project cannot be said to have arisen from the FEED Report concerning the East Rockingham Project. The contemplation of a FEED study specifically for Port Hedland leaves open the extent of the common ground between such a study and the FEED study already undertaken concerning East Rockingham. Read as a whole, the email is consistent with NEC continuing to expect and require that the performance guarantee aspects of the EPC would be derived, entirely or substantially, from the FEED study already conducted and that such performance guarantees were to be provided by Kiewit in accordance with earlier communications. More generally, NEC's ongoing attempts during 2016 to negotiate with Kiewit with a view to entering a satisfactory agreement do not deny the existence of a genuine claim by NEC of the kind already identified.
[86] Appeal ts 6.
[87] GAB 422.
In any event, Kiewit's argument does not fully address NEC's claim, which contends that Kiewit has refused to offer a 'full wrap' performance guarantee at all. As a result, NEC claims its expenditure on the ECI contract is necessarily wasted, irrespective of the particular project which it sought to pursue, because Kiewit's refusal to give a 'full wrap' performance guarantee means NEC cannot and will not proceed to use Entech technology in any future project. At the time of negotiations about the EPC contract, Kiewit did not advance the reduced scale of the Revised Boodarie Project as the reason why it refused to provide a 'full wrap' performance guarantee. In that context, there is a plausible contention that Kiewit's indication that it was not prepared to provide a 'full wrap' performance guarantee was not confined to the Revised Boodarie Project.
The fact that Kiewit's expression of interest concerned the Boodarie Project and the FEED Report concerned the East Rockingham Project, whereas the Draft Term Sheet related to the Revised Boodarie Project, may create an obstacle to the success of NEC's claim. However, for the reasons above, it does not sustain a conclusion that NEC does not have a genuine claim.
Lack of specification of performance crieteria
Kiewit's second asserted fatal flaw may be dealt with more briefly. Kiewit says that its alleged refusal to guarantee performance related to a level of throughput performance that was, at that relevant time, entirely unspecified by NEC. This contention falls well short of demonstrating the absence of a genuine offsetting claim. On NEC's case, having done the ECI works, it was for Kiewit to set and then guarantee a minimum level of performance.[88] Kiewit may argue that this is an objectively unlikely arrangement and that the terms of the arrangement put the onus on NEC to propose and determine the required performance levels, but these are matters to be resolved in the determination of the merits of NEC's claim.
Evidence as to causation
[88] See, for example, GAB 344, second Pugh affidavit [16].
Thirdly, Kiewit contends that NEC did not lead sufficient evidence to demonstrate an arguable causal link between the alleged failure to provide a 'full wrap' for the Revised Boodarie Project and the alleged wasted expenditure concerning the East Rockingham Project.
Kiewit points to the generality of the language of Mr Pugh's affidavit.[89] Complaints as to the generality of language of Mr Pugh's affidavit must be evaluated by reference to the issue in an application under s 459H. The issue is whether there is a genuine counterclaim; in other words, a serious question to be tried or a plausible contention requiring investigation. The issue is not whether the applicant's offsetting claim will succeed. Thus, on an application under s 459H, evidence may be expected to be, and may permissibly be, at a higher level of generality than evidence directed to proof of the claim at a final hearing.[90]
[89] Appellant's submissions [14]; appeal ts 14, 15 ‑ 16.
[90] See, for example, Britten‑Norman [39] - [45], and cases there referred to.
When this is taken into account, having regard to the matters set out at [58] ‑ [60] and [62] ‑ [63] above, NEC's asserted offsetting claim could not be rejected as spurious, or not genuine, on the ground of an absence of evidence to establish a causal link in the manner alleged by Kiewit.
Further, Kiewit submits that the evidence shows that the East Rockingham Project failed prior to, and for reasons independent of, Kiewit's alleged refusal to provide a 'full wrap' performance guarantee.[91] Kiewit points to Mr Chowdhury's evidence that, at the meeting on 1 May 2015 with Mr Lloyd, Mr Lloyd said words to the effect that the East Rockingham Project was not viable with the current price.[92]
[91] Appeal ts 9 ‑ 10, 13, 19, 23.
[92] GAB 564, affidavit of Chowdhury [6].
This evidence, which was not contested, is not fatal to NEC's claim. NEC's claim does not assert that Kiewit's refusal to give the 'full wrap' guarantee rendered the East Rockingham Project unviable. Rather, NEC's claim involves the steps set out at [53]. In this framework, it is not to the point that the East Rockingham Project may have become unviable in May 2015 for different reasons. On NEC's case, it suffered loss by reason of Kiewit's misleading or deceptive conduct in that its expenditure on the East Rockingham FEED Report was wasted. That is because, although NEC should have been able to progress the Revised Boodarie Project using Entech technology and with reference to the FEED Report, it could not do so because Kiewit refused to provide the 'full wrap' that was required by financiers in order to proceed with the project.
For these reasons, ground 1 fails.
Ground 2: Subsequent conduct
Ground 2 concerns NEC's conduct after 29 November 2015. Kiewit says that conduct demonstrates that NEC suffered no loss from Kiewit's refusal to provide a 'full wrap'. Kiewit's submissions on ground 2 place considerable emphasis on Mr Lloyd's email of 1 September 2016. The terms of that email are set out at [35] above. Kiewit alleges that this email is, in effect, an admission by NEC that the 'back‑to‑back' guarantee offered by Kiewit was sufficient to satisfy NEC's financiers. This contention falls well short of justifying rejection of NEC's asserted offsetting claim as not a genuine claim. The email is, at the least, open to a different reading. In the paragraph of the email immediately after the paragraph on which Kiewit relies, Mr Lloyd enquires whether, if Entech were willing to provide the 100% security requested, Kiewit would provide the performance guarantees as laid out in the EPC terms sheet. Read as a whole, the email can be read as an attempt by Mr Lloyd to explore ways in which Kiewit might provide the performance guarantees to NEC proposed in the Draft Term Sheet. Kiewit did not reply to Mr Lloyd's email.
Further, there was evidence that NEC, through Mr Lloyd, expressed immediate concern about Kiewit's refusal to provide the performance guarantees expected by NEC. Mr Lloyd's email of 1 December 2015, sent within two days of Kiewit's email of 29 November 2015, described the issue as a 'show stopper'.[93] Mr Lloyd reiterated NEC's concerns in this respect in his email of 28 July 2016, set out at [33] above.[94]
[93] GAB 461.
[94] GAB 422.
For these reasons, ground 2 fails.
In our view, the evidence established that NEC had a genuine claim for damages for its losses, constituted by its wasted expenditure on Kiewit's FEED Report, arising from Kiewit's misleading or deceptive conduct in representing that it would provide a 'full wrap' performance guarantee as an element of an EPC contract relating to the Boodarie Project or the East Rockingham Project, or a project that arose or resulted from a FEED study.
Conclusion
For these reasons, we would dismiss the appeal.
I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
DM
ASSOCIATE TO THE HONOURABLE JUSTICE BEECH19 OCTOBER 2018
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