Pan Orient Shipping Services Pty Ltd v Basell Australia Pty Ltd
[2007] VSC 215
•6 July 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
IN THE ADMIRALTY LIST
No. 5892 of 2006
| PAN ORIENT SHIPPING SERVICES PTY LTD (ABN 19 082 751 460) | Plaintiff |
| V | |
| BASELL AUSTRALIA PTY LTD (ABN 42 004 327 762) | Defendant |
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JUDGE: | BYRNE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 30 April, 1, 2, 3, 7, 8, 9, 10, 14 May 2007 | |
DATE OF JUDGMENT: | 6 July 2007 | |
CASE MAY BE CITED AS: | Pan Orient Shipping Services Pty Ltd v Basell Australia Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 215 | |
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Contract– construction of contract – whether lump sum contract – whether lump sum contract amended by agreement during performance – whether full indemnity contract - estoppel by convention – variations.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Thompson SC with B Carr | Russell Kennedy |
| For the Defendant | Mr JB Davis | Blake Dawson Waldron |
| For the Third Party | Mr AA Monichino | Dibbs Abbott Stillman |
HIS HONOUR:
In 2005, the defendant, Basell Australia Pty Ltd ("Basell"), was engaged in the upgrading of its polypropylene plant at Geelong. This was a major project with a cost of some $70 million. For the purpose, Basell engaged as designer and construction manager the third party, Sheddon Uhde (Australia) Pty Ltd ("Sheddon Uhde"). A component of this project was an item of plant called a splitter column which had been manufactured by and pre-purchased from WE Smith Hudson Pty Ltd ("WESH") in Coffs Harbour, New South Wales. The splitter is a very large item: it is in the form of a metal tube some 67m long, 4.75m in diameter and weighing some 250-300 tonnes.
It was therefore necessary to move the splitter from the WESH yard at Coffs Harbour to the plant site at Geelong. For this purpose, Basell on or about 14 July 2005, retained the plaintiff, Pan Orient Shipping Services Pty Ltd, to undertake the transportation. The plaintiff carried on business as an international and domestic freight forwarder and logistics consultant under the name AFS Projects and Logistics and was referred to in this case simply as AFS. The AFS contract provided that Basell would pay to AFS a total contract sum of $611,880 for the performance of its obligations. In the event, the cost of the transportation was of the order of $2.8 million. Basell has paid for this, $533,500 to AFS and $1.1 million to the sea carrier engaged by AFS, a total of $1,633,500, so that AFS, in this proceeding, seeks to recover the balance of about $1.2 million. Basell, for its part, seeks to recover from AFS the sum of $1.1 million which it paid to the AFS sea carrier.
The alternative claim of AFS against Sheddon Uhde is not pursued so that Sheddon Uhde is no longer a defendant. Basell, however, in its third party claim seeks relief against Sheddon Uhde in the event that it fails against AFS. This trial does not concern all of the questions in this proceeding. At the request of counsel for Basell and Sheddon Uhde and with the acquiescence of AFS, certain questions in the third party claim have been deferred until after the determination of all other questions. The deferred questions are the following:
(a)the questions raised by paragraph 18A(a),(d),(e),(g),(h),(j) and (k) of the amended defence to third party amended statement of claim filed by leave granted on 1 May 2007; and
(b)the quantum of the loss and damage suffered by the defendant as alleged in paragraphs 21, 22 and 24 -27 of the amended third party statement of claim dated 13 April 2007.
The AFS Contract
The AFS contract was awarded to AFS following the calling of tenders by Sheddon Uhde on behalf of Basell. AFS, as the successful tenderer, was instructed to proceed by letter of intent dated 1 July 2005. The transportation involved road transport from the WESH yard to the Coffs Harbour wharf, by sea to the port of Geelong and then by road to the Basell project site.
In the tender documents, tenderers were directed to propose their lump sum price for the work to be performed in accordance with a detailed specification and general conditions of contract. This, AFS did. In addition, it set out the break up of its $613,880 proposed contract sum, although this was not required in the conditions of tender. This break up was as follows:
Road Transport 110,380 Sea freight 480,000 Road Survey 3,500 Management Fee 20,000 $613,880
In each case the sums were exclusive of GST. In the post-tender discussions, the management fee component was reduced to $18,000, so that the price which was ultimately accepted was $611,880.
Benton James O'Connor, the AFS project manager responsible for this transport, said that he put the tender price together by obtaining prices by email for the road transport from Bradshaw Ultra Heavy Haulage Pty Ltd ("Bradshaw Haulage") and for the sea transport from Sea Tow Ltd. The emails were not produced. These were the prices inserted in the tender. Mr O'Connor said, as to the Sea Tow price, that it was not a fixed price. The management fee, he said, was to be the AFS profit component. At the post-tender meetings with the Sheddon Uhde representative, Andrew Wing-Hai Chang, attention was focused on the operational aspects of the transportation rather than commercial matters. Norman James Bradshaw of Bradshaw Haulage was present at one such meeting on 14 June 2005 but no representative of Sea Tow were in attendance. There was no discussion of commercial aspects of the transportation at this meeting.
The documents which were sent out in the invitation to tender, and which later became part of the AFS contract documents, appear to be Basell standard form documents adopted for other contracts in this construction project. They contain a number of drafting errors and deficiencies, and in very many respects, do not sit comfortably with a contract for transport, especially for sea transport. They were, nevertheless, accepted by the parties as constituting the AFS agreement. The contract documents which were sent to AFS on 14 July 2005 for its consideration and execution were never executed. The work, which was already in hand, continued, and it was accepted by all parties that AFS, by its conduct, accepted the documents as the contractual documents.
The contracting parties were, of course, Basell and AFS. Sheddon Uhde was identified in Article 3 as the agent of Basell with a very broad authority. As between AFS and Basell, it was common ground that Basell was bound by the acts of its agent. The contract provides for a contract price which is defined as the sum referred to in Schedule 4 as may be adjusted under the contract. The relevant portion of Schedule 4 is important. I set it out in full:
2. Price
The Prices set out below except as otherwise provided for under the Contract shall include but not be limited to all Constructional Plant, temporary work, all labour, leave provisions, all taxes, employment on-costs, transportation, supervision, profit, overheads and administration costs, consumables, insurances, storage and workshop facilities, temporary power, communications and the like.
Item Description Unit Lump Sum
Price ($)1 Road transport (FCA WESH to Coffs Harbour Ramp/Geelong Wharf to Basell site) Lump Sum 110,380.00 2 Sea freight Lump Sum 480,000.00 3 Road Survey Lump Sum (est at cost) 3,500.00
4 Management Fee Lump Sum 18,000.00 Total Contract Sum (excluding GST) 611,880.00
The contract price was payable upon completion of the whole of the work.
The contract provides in Article 6 for variations and, it would seem, for the adjustment of the contract price as a consequence. The contract also provides that the contract price may be adjusted following a direction by Basell that the sequence of work be changed or following an instruction by Basell to accelerate the work[1] or, in certain circumstances, following a suspension instruction.[2]
[1]Article 29.
[2]Article 31.
The work and services to be performed by AFS are described in the contract in some detail, particularly in the Construction Contract Requisition RQ25462 CON 0035, a seven page document which forms part of the contract. In essence, it provides for AFS to pick up the splitter where it was located in the WESH yard on a temporary stand, to load it and carry it by road, sea and road and to unload it onto temporary dressing stands at the Basell project site. AFS is also to rotate the splitter to its final lifting position, if necessary. The work also includes the provision of necessary permits including marine surveys and all necessary saddles and "load security installation and removal and any other equipment necessary to complete the transport".[3]
[3]Requisition 1.2(i)(j).
Mr O'Connor said that he understood that items 1 and 2 of the AFS price in Schedule 4 were not fixed prices; they were to be adjusted to reflect the actual cost to AFS of the road transport and the sea transport respectively. He said that this was so, first, because this was common in the logistics industry and, second, because the time for the submission of tenders was short - too short for him to obtain fixed prices from subcontractors. Counsel before me referred to such a contract as a fully reimbursable contract. As he explained how these considerations affected his pricing process, inconsistencies emerged. In the context of industry practice, he said in his witness statement that "it is common in the logistics industry for contract prices to pertain to core costs, without specifying that, additionally, reimbursement will be made for extra expenses incurred to subcontractors and others as the project proceeds". This is, of course, not the same as a fully reimbursable contract. The impact of the inadequate tender time was not limited to non-core costs: as to this Mr O'Connor said:
I believe at the outset we put in a dollar value to carry the freight. It was always to be our assumption that as the project expanded and more data became available we could then cost the project accordingly and pass on those costs because it is absolutely impossible in five days to be able to put a price in to carry a column from Coffs Harbour to Melbourne without even having examined the piece of equipment, looking at the carriage side of it, looking at what kind of vessel we would need to do it is absolutely impossible.
The evidence was not sufficient to warrant a conclusion that the terms of the contract included a term from industry practice and no such contention was made. Mr O'Connor did not make known to Basell or to its representatives or agents any uncertainty on his part as to the lump sums which AFS included in its price. It is not suggested on behalf of AFS that his uncommunicated understanding without more or the common practice, if it be the case, were part of the contract or could bear upon its construction, except insofar as they formed part of the matrix for the purposes of construction of the documents.
The terms as to rise and fall
AFS contends, first, that, upon its true construction, the contract included a term that items 1 and 2 in Schedule 4 would vary as the cost to AFS changed. I do not accept this submission. The document, notwithstanding its shortcomings, is clearly expressed. The price is to be a lump sum price and neither the terms of the tender nor the contract documents admit a contrary construction.
As to the evidence of the matrix or surrounding circumstances, I am not persuaded on the evidence that the common practice referred to by Mr O'Connor was one which was known to Basell or to its agent Sheddon Uhde or was so notorious or widely accepted that knowledge of it should be imputed to them.[4]
[4]Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 352, per Mason J.
Mr O'Connor had had extensive experience in the transport and logistics industry extending over some 40 years. I accept his evidence that it is common in that industry for the pricing for sea transport and land transport to be subject to adjustment for matters of which standby and demurrage are examples. I accept, too, that at all times he had the expectation that the tender price might be adjusted in this way. He accepted, however, that this is not always the case and that the contract may be for a fixed price so that the risk of these matters lies with the carrier. The documents in this case, upon their proper construction, provide for a fixed price which may be adjusted only in accordance with the contractual provisions or by further agreement between the parties.
Then, it is said that it is an implied term of the AFS contract that changes in the cost to AFS of the land transport and the sea transport would produce a corresponding change in the contract price. The implication is said to arise from the mutual assumption of Basell and AFS that such a term existed and to give business efficacy to the contract. I find that, at the date of contract, Basell or its agent, held no such assumption. They had put the transport contract to tender on a fixed price basis and evaluated the tenders on that basis.
I am not persuaded that the suggested term satisfies the strict requirements for the implication of such a term. It will be noted that the parties have, in a very detailed contract, provided for a lump sum contract with provision for an adjustment of the contract price where a variation of the work is ordered. The term which AFS would import into the contract would have the effect of varying the lump sum price where, for whatever reason, including reasons over which Basell could have no control, a subcontractor varies its price. The BP Refinery case[5] criteria for the implication of a term are not here to be found.
[5]BP Refinery (Western Port) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266.
A further suggested implied term would vary the management fee component where the amount of the management work varied.[6] In such an event, Basell would be obliged to pay to AFS "a reasonable management fee in excess of the $18,000.00 stated in Schedule 4". This suffers from the same shortcomings of the implied term which I have rejected, and then some. The management fee is said by Mr O'Connor to represent the profit of AFS. I doubt that this is correct, suspecting as I do that it includes also overheads and administration of the transportation. Even so, the suggested term would have the consequence that this component is at large if any extra management, for whatever cause, became necessary. This is not a term I would import into a commercial contract without some clear warrant.
[6]Statement of claim para 13. The pleading speaks of the "scope of the work" changing, but counsel explained that this was not what was intended.
Attention was then shifted to events which occurred after the AFS contract was made. The most notable of these events was that it became necessary to engage a new sea carrier. It was said that these events had one or other of the following legal consequences:
·The events occurred in circumstances where I should find that the parties agreed to amend the contract so that the consideration for the relevant component of the work to be performed changed from a fixed price to a sum representing the actual cost of that component to AFS.
·By the principle of estoppel by convention, the parties are precluded from denying that the contract sum in the AFS contract would be adjusted as the actual costs of the road transport component and the sea transport component changed.
·A similar consequence alleged to arise by the application of the principles of estoppel in pais was not pressed.
·The events amounted to or led to variations within the meaning of Article 6 so that they operated to adjust the contract price.
Amendments to the AFS Contract
The use in the statement of claim of the word "variation" was productive of some confusion which, I fear, was not entirely dispelled as the case unfolded. In its traditional sense, "variation" refers to a change in the scope or manner of performance of work or services to be performed. In the AFS contract, such variations are dealt with in Article 6. Counsel for AFS told me at the outset that the word in the pleading was not intended to have this meaning; it means that the parties agreed to change the terms of the contract itself.
Furthermore, this is not a case where AFS alleges that the variations which were ordered were of such a nature as to transform its obligations under the AFS contract to such an extent that Basell should be taken to have repudiated that contract and that AFS has brought it to an end. In such a case, the contractor might be entitled to be paid for its work a sum calculated on a quantum meruit basis.[7]
[7]See Thorn v London Corporation (1876) 1 App Cas 120 at 127, per Lord Cairns LC; Wegan Constructions Pty Ltd v Wodonga Sewerage Authority [1978] VR 67 (the point is better illustrated in the whole of the judgment of Lush J part only of which has been reported).
Nor is it a case where the variations were outside the scope of the variations power under the AFS contract so that AFS seeks to be paid for the variation work on such a basis.[8] What is put here is that the conduct of the parties gives rise to a contract under which the terms of the AFS contract have been changed. All of the work of AFS is to be paid for on the basis of full reimbursement of the charges which it is obliged to pay to its subcontractors and, further, that it should have a reasonable management fee.
[8]See Balfour Beatty Power Construction Aust Pty Ltd v Kidston Goldmines Ltd [1989] 2 Qd R 105.
It should be noted that the amendments to the AFS contract alleged in the statement of claim are not entirely as I have summarised in [20] above. What is pleaded is that, in respect of a number of specific items of work performed by AFS or by its subcontractors, Basell and AFS agreed that AFS should be reimbursed for the costs to it of that item. As the trial was conducted, however, these individual agreements to amend became part of a wholesale agreement to amend the whole price. This is not surprising, given the way the case was pleaded in paragraphs 74 and following of the statement of claim and I am content to proceed on that basis as, it appeared, were the parties.
The events relied upon as bringing about a transformation of the AFS contract from a fixed price contract to one which was wholly or in part a fully reimbursable contract or a cost plus contract, were numerous. I shall consider those which commanded particular attention at this trial and then turn to the more general allegation based upon all of the dealings between AFS and Basell through its agent Sheddon Uhde.
The Shipping Changes
By far the greatest change in the cost to AFS in performing the AFS contract was due to two shipping changes. The original carrier was to be Sea Tow. There is no evidence of the commercial terms of its proposed carriage other than the figure of $480,000 which found its way into the AFS tender. Shortly after 15 July it became apparent that Sea Tow was unable to carry out the sea carriage and it withdrew on or about 20 July.
A number of alternatives were investigated by Mr O'Connor and, by 23 July, he had a shortlist of two carriers, Austral Marine Logistics Pty Ltd ("Austral") and Devine Marine Group Pty Ltd ("Devine"). Devine was selected on 25 July 2005 and it offered to load and carry and unload the splitter for $380,000. It should be noted that this offer was not unconditional and, further, that the proposal included an agreement in the terms of the Baltic and International Maritime Council ("BIMCO") standard lump sum ocean carriage agreement. This standard agreement provides for demurrage and the rate for this was proposed at $10,000 per day. The Devine proposal was forwarded to Mr Nest on the same day. Using the Devine barge, however, the splitter would not be at Geelong until early September and Mr Chang was also informed of this.
Under the AFS contract, subcontractors were required to be approved by Basell before they were engaged.[9] According to Mr Chang, he approved Devine; Mr O'Connor said that Mr Chang instructed him to use Devine. Insofar as it is necessary to decide this issue my task is not made easy by the generality of Mr Chang's account of this in his witness statements and by the fact that he was not cross-examined about this conversation. Notwithstanding my reservations about the accuracy of Mr O'Connor's recollection generally, I accept his evidence on this matter. I find that he discussed with Mr Chang the capacities of Austral and Devine to perform the sea carriage including the operational difficulty caused by the fact that the Austral barge was shorter than the splitter. Mr O'Connor sought an instruction and was told to use Devine. Mr Chang confirmed this by email of 3 August. In his email Mr Chang expressed himself with more caution, writing: "It is acceptable for AFS to subcontract sea freight services to Devine..." So expressed, the involvement of Basell by its agent Sheddon Uhde conformed to Article 5 of the AFS contract.
[9]Article 5
It is of interest to note that, in the same email, Mr Chang confirmed that the lump sum price for sea freight in Schedule 4 of the AFS contract would be reduced from $480,000 to $380,000, doubtless reflecting the Devine price. This is of interest for three reasons. First, the reduction of the price in these circumstances suggests an understanding that at least this component of the AFS contract price was to rise and fall with the actual price to AFS. Second, Mr Chang's reference to amending the price in Schedule 4 sits very uneasily with the submission of AFS that the lump sum pricing arrangements in the AFS contract were otherwise modified or abandoned at this time. Third, the Chang email, picking up as it does the Devine lump sum price, appears to ignore the serious qualifications to that price to which I have referred. This may reflect simply that he, as an engineer with a construction background, failed to see the significance of these qualifications or that he was aware of them and was content to catch a bargain by inserting in the AFS contract, as a true lump sum, a figure which, in truth, was not such a true lump sum. It would seem too, that, there was a failure on Mr O'Connor's part of attention to this detail because he treated Mr Chang's email simply as an instruction to proceed. Accordingly, on 4 August he issued a letter of intent to Devine. In this letter of intent Mr O'Connor accepts the BIMCO terms but fixes the price at $380,000 plus GST not subject to variation without prior agreement of AFS. No mention is made of $10,000 per day demurrage or any other possibility of price variation.
A few days later on 7 August, Devine's naval architect, Mike Seward sent to Mr O'Connor a copy of a BIMCO based agreement between AFS and Devine. This proposed Divine subcontract included demurrage at $10,000 per day. Mr O'Connor examined this document carefully and made a number of drafting suggestions which were accepted on 9 August. On 10 August Mr O'Connor submitted to Mr Chang a proposed shipping carriage agreement to be entered into between Basell and AFS which was said to be "back to back" with the Devine subcontract. This draft included terms matching the Devine subcontract including provision for payment of the $380,000 by instalments: 25 per cent ($95,000) upon contract; 50 per cent ($190,000) upon clearance for departure; 20 per cent ($76,000) upon arrival at Port Phillip Bay and 5 per cent ($19,000) plus adjustments upon off-loading. It will be recalled that under the AFS contract there is no provision for payment prior to completion.
Mr Chang's response of the same date is very significant:
Hi Brenton,
I'm not sure why this document is necessary. We have a negotiated contract in place for AFS to perform this work. There wasn’t any mention, at the time of tender, for this requirement.
In the following correspondence, Mr O'Connor, rather unconvincingly, suggests that the submitted sea carriage contract was in fact a booking note mentioned in the AFS tender. He added, too, that this was the standard procedure for AFS. In any event, the proposed sea carriage agreement was never executed or accepted by Basell or Sheddon Uhde.
The BIMCO based Devine subcontract was in fact executed on 15 August.
Under the AFS agreement the splitter was to be delivered and unloaded at the Geelong site by 1 September. Under the Devine subcontract, the date of departure from Coffs Harbour is 2 September. On 19 September, when the splitter had not yet left the WESH yard, Mr O'Connor learnt that Devine was unable to obtain a permit to carry the splitter. He advised Mr Chang immediately and set out to find a new sea carrier. Not surprisingly, his attention then turned to Austral and, in due course, the subcontract was awarded to that company.
The selection of Austral as the new sea carrier immediately posed serious difficulties, operational as well as commercial. And these difficulties had to be addressed against the background that the splitter was urgently required for installation at the Geelong project site.
First, Austral's provisional price submitted on 22 September was greater than that of Devine or Sea Tow; it was for $485,000 plus GST. Furthermore, confronted with the changed operational aspects, Bradshaw Haulage foreshadowed a review of its pricing and Mr Chang was advised of this by email on 23 September.
What was proposed was that a barge, the Swissco Marine V which was then in Melbourne should be towed to Coffs Harbour and modified to take the splitter. The towing was to be carried out by the vessel Leaders Creek which was to travel from Sydney to Melbourne for the purpose. By email on 24 September, Mr Chang requested Mr O'Connor to proceed with these arrangements. In this email, Mr Chang also requested Mr O'Connor to confirm the price differential with Bradshaw Haulage and agreed to pay AFS costs of implementing this "authority to proceed" plus a 10 per cent margin as from 24 September in the event that the Austral arrangements did not go ahead. On the following day, Mr O'Connor gave the necessary direction to Austral and requested Bradshaw Haulage to submit its repricing.
The operational matters mainly concerned the arrangements which were required by reason of the fact that the Swissco Marine V barge was shorter than the length of the splitter. This necessitated modifications to the barge to enable it to carry the load safely and also to support the splitter during the loading operation. These were discussed at a meeting which were present Mr Chang, Bruce Ride (the Sheddon Uhde project manager) and other Sheddon Uhde personnel, Mr O'Connor, Captain Peter Lambert of Austral, Bob McDowell (representing the barge owner) and representatives of Bradshaw Haulage. It was there decided that the strengthening of the barge would be carried out by Austral in White's Bay, Sydney and that the barge would be diverted there on its north-bound journey from Melbourne. The harbour costs as White's Bay would be accepted as an extra cost. The loading configuration also required that WESH prepare a third saddle to support the splitter and this was agreed to.
Much of the meeting was concerned with the dates for the completion of the stages of the transport. The tug was to depart Sydney as soon as possible. The formal commencement of the charter party for the tug was 0000 hours on 29 September. The tug and barge were to arrive at Coffs Harbour on or about 9 October. The splitter would arrive by road on 9 or 10 October so that the laden barge would set sail on 11 or 12 October, arriving in Geelong between 16 and 19 October.
There was no discussion as to other commercial aspects of the new transport arrangements.
On the following day, 29 September at 4.15pm, Mr Chang sent an email to Mr O'Connor confirming the recent discussions and stating that the engagement of Austral was acceptable subject to certain conditions, not all of which were accepted by AFS. The email also provided this:
The subcontract lump sum price for seafreight services in Contract number 25462-CON-0035, Schedule 4 clause 2 Item 2 "Seafreight" shall be amended to AUD485,000 (ex GST)".
Mr Chang requested acceptance by return email. Some days later, on Monday 3 October, Mr O'Connor responded by returning the Chang email with his comments attached. Of present interest is that his comment upon the passage quoted above is simply, "noted". The work then went ahead. The tug had left Sydney at 1930 hours on Thursday 29 September.
It will be noted that the terms of the Chang email bears some resemblance to his email of 3 August which I have summarised above.[10] The three comments I there made are more or less applicable to this 29 September email.
[10]See para [28] above.
On Friday 30 September, Austral submitted its $485,000 price. This incorporated a modified BIMCO charter party. Works which were outside the contract included the cost of harbour assist vessels and structural additions to the barge as well as lashing and securing, saddling and ramping arrangements. The offer also contained a provision that, where work is performed by Austral's subcontractors the fees and charges paid to those subcontractors plus a 30 per cent margin were to be payable by AFS.
Mr O'Connor duly signed and accepted the terms of the Austral letter of 30 September and executed the required Austral subcontract based on the BIMCO terms. The date of this acceptance is uncertain. In correspondence Mr O'Connor speaks of this contract being in place when he forwarded it to Mr Chang on 5 October. He said in the witness box he was unable to recall when he signed and returned to Austral the documents comprising the Austral subcontract. He was, however, confident that this was done after he had received Mr Chang's 29 September email and before he forwarded the documents to Sheddon Uhde.
This chronology was much relied upon by counsel for Basell and Sheddon Uhde at trial. Its significance, they said, lay in the fact that AFS had bound itself by subcontract to Austral at a time when it was clear from Mr Chang's email of 29 September that Sheddon Uhde still saw the AFS contract as having a lump sum basis. I accept their analysis of the chronology rather than that offered on behalf of AFS that it was bound to Austral by one or other of its emails to Austral of 8.56am on 25 September, that of 2.27pm on 26 September or that of 7.21am on 29 September. All of these, of course, preceded the Chang email. I do not construe these emails as being anything more than an interim instruction to Austral to proceed on the basis of the Chang email of 24 September. It is significant that on 28 September at 5.53pm, Captain Lambert was still seeking a letter of intent and that, at the time the last of these emails was despatched, Austral's offer had not yet been received. I conclude that a contract came into existence between Austral and AFS when Mr O'Connor signed and returned the Austral subcontract and that this occurred on a date after 30 September.
This, however, is not the end of this matter because it was submitted that the Chang email of 29 September did not put beyond doubt the continuing existence of the lump sum contract. I have referred to the ambiguous signals it contains. Add to this the readiness at this stage of Sheddon Uhde to entertain a reworking of the Bradshaw price and at least some modifications to the sea freight price to accommodate the new barge arrangements.
Upon a careful consideration of these documents and the evidence of the verbal communications, however, I conclude that, viewing them objectively, they do not indicate an abandonment of the lump sum characteristic of the AFS agreement. The amount of this lump sum for sea freight changed and Sheddon Uhde was prepared to treat certain charges as Article 6 variations, but the lump sum for the agreed services remained. Moreover, insofar as I am required to make a finding of the actual state of mind of those responsible at Sheddon Uhde and Basell, I find that this is how they saw these things. Mr O'Connor, who always had a different view as to these matters, may have interpreted the emails and conversations differently, but this was because he was seeing them from his own perspective. In short, there was no amendment to the basic structure of the AFS contract upon the engagement of Austral as sea carrier.
It is not necessary that I set out in detail the events that followed. The work on the barge was carried out; the barge with the splitter left Coffs Harbour on 25 October and arrived at the Port of Geelong on 7 November where the splitter was unloaded and carted to the plant site.
Having entered into the Austral subcontract, AFS on 5 October once again sought to persuade Basell to enter into an agreement which was back to back with the Austral subcontract. This invitation was not responded to; it was certainly not accepted. I observe in passing that the alternative suggestion in this email is for Basell to enter into an agreement with AFS effectively indemnifying it against its liability to Austral under the Austral subcontract. This is inconsistent with Mr O'Connor's assertion that the basis of the arrangement between Basell and AFS was always that Basell would indemnify AFS in respect of its costs incurred to its subcontractors.
Road Transport Changes
On 5 October Bradshaw Haulage submitted its revised price of $163,260 for the road transport. This represented an increase of $52,880 over its price as set out in the AFS contract in July. This sum represented an extra $32,880 for changes which are described in its email of 4 October, an extra $15,000 for the extra costs of rotating the splitter at Coffs Harbour and $5,000 which was to be passed back to AFS for its management. This last component was accepted by AFS as an inappropriate concealed "kick back" which, not surprisingly, it does not now seek to recover. The revised price was submitted to Sheddon Uhde which required further information. This was provided on 6 October. The Bradshaw Haulage costs variation was then dealt with as a claim for extra payment for a change in the scope of work. This was not precisely in terms of Article 6 because the scope of work is in the AFS contract expressed in very general terms. It seems that Sheddon Uhde approached the question in a fairly pragmatic way, accepting as a change in scope any work that was different or extra to that which was originally contemplated. For my present purposes, it is sufficient that I note that Sheddon Uhde did not at any stage treat the road freight component of the AFS contract price as being payable on a fully reimbursable basis. It did not by its conduct indicate to AFS that it treated this component in this way. I find that, viewed on an objective basis, its conduct did not lead to such a conclusion.
Other Matters
AFS contends that, individually or in conjunction, a number of other matters led to the conclusion that AFS and Basell had agreed to transform the AFS agreement into a fully reimbursable agreement.
For the most part these matters are relied upon to show that interventions by Sheddon Uhde and by John Cupitt, the representative of Basell's underwriters, in operational aspects of the transport led to this conclusion. It was put that, under the AFS contract, the task of carrying out the transport was entrusted to AFS. AFS was responsible for operational matters to the exclusion of Basell and its agents. This appears to be substantially correct. When I invited counsel for Basell to point to its contractual entitlement to intervene in these matters, they were able to point only to Article 6 (variations) and Article 27 which permits Basell to give directions as to the sequence and timing of the activities of AFS. Apart from the requirement that AFS obtain the approval of Sheddon Uhde for certain technical documents[11] and the power of Sheddon Uhde to resolve certain technical issues,[12] responsibility for the transport lay with AFS.
[11]Requisition para 1.2(b).
[12]Requisition para 4.
Notwithstanding this, AFS appears to have accepted that Sheddon Uhde had a general supervisory role in most, if not all, aspects of the performance of the AFS contract, both commercial and operational. It accepted, too, that the underwriters had a role in directing aspects of the stowage, securing and other aspects of the carriage which might bear upon the risk of loss. In so doing, AFS accepted without complaint suggestions and even directions from those persons. This acceptance cannot, in my view, be taken to indicate an agreement between Basell and AFS to transform the AFS contract into a fully reimbursable agreement. Certainly, nothing said or done by the parties indicated any such agreement.
I therefore reject the submission of AFS that the AFS contract was by agreement between the parties transformed in whole or in part into a reimbursable agreement by reason of any of the suggested matters or all of them in conjunction.
Estoppel by Convention
The claim was put on the alternative basis that the parties had at all times conducted themselves on the basis that the payment arrangements were that Basell should pay to AFS a sum equal to the costs it incurred to its subcontractors plus a reasonable management fee.
The principles underlying such a claim are well established. In order to found such an estoppel in a case such as the present the parties must actually have had an assumption that the AFS contract was, at the time, a contract for payment on a fully reimbursable basis and not a lump sum contract. This assumption must, too, have been supported by some "mutually manifest conduct" and that the parties, or perhaps the party asserting the estoppel, shifted their position in reliance upon this mutual assumption. In these circumstances, it may be, and commonly will be, unconscionable for the other party to fall back on the terms of the contract which both have discarded.
It will be apparent from my analysis of the facts of this case that no such estoppel here arises. I do not find that Basell or its agent had the assumption which counsel for AFS asserts. They always treated the AFS contract as a lump sum contract.
Furthermore, neither of the parties manifested the existence of any such assumption. Counsel for AFS has picked out from the voluminous correspondence such indications as may be found of Mr O'Connor's state of mind on this matter. I am not persuaded that he ever made manifest his apprehension of the assumptions he said he made. Moreover, as I have mentioned, it is not altogether clear what precisely was his assumption.
The AFS contention becomes wholly unsustainable when attention passes to the conduct of Mr Chang and the other representatives of Sheddon Uhde. Basell itself was not directly involved. The conduct pointed to by counsel for AFS is explicable as a manifestation of the urgency which attended the project as time passed without the transport having been commenced. It is explicable also as a fairly flexible approach to the administration of the AFS contract.
I doubt, too, whether the parties in truth shifted their ground on the basis of the suggested assumption. At all times, AFS accepted that it was responsible to load, carry and unload the splitter. Its efforts were directed to this end and these efforts were unaffected by the suggested assumption. The position of Sheddon Uhde with respect to payment shifted as to the times of payment, but this was to meet the convenience of AFS. It did not ever accept the suggested assumption as to the mode of calculating the payment which was ultimately to be made to AFS.
I therefore reject the submission of AFS that the rights of the parties were established by an estoppel by convention. Such modification to the lump sum contract as remains in dispute between Basell and AFS must depend upon the operation of the terms of the contract for varying the price, notably Article 6 for variations, properly so called.
Variation Claims
Article 6 presents its own difficulties of construction. It is in these terms:
6.1The COMPANY shall have the right at any time to request variations of WORK OR SERVICES.
6.2The Contractor shall furnish to the COMPANY upon request a written statement containing:-
(i)the amount by which the CONTRACT PRICE will be increased or decreased as the case may be; and
(ii)any other effect the variation of WORK OR SERVICES may have on any other provision of the CONTRACT
if the variation of WORK OR SERVICES, as contemplated by the COMPANY were to be effected. The statement shall be prepared in such detail as the COMPANY may require.
6.3If the COMPANY agrees to the written statement and decides to order the variation of WORK OR SERVICES, it shall notify the CONTRACTOR thereof in writing whereupon the variation of WORK OR SERVICES shall be deemed to be incorporated in the WORK OR SERVICES.
"Variation" is not defined. I shall give it the usual meaning in this context of a change in the scope or manner of performance of the work or services agreed to be provided under the contract. Second, the article does not deal with the common situation as here, where the procedure of a request followed by a written statement and then by an order to proceed, does not occur. It is difficult to suppose that the contractual intention is that AFS should not be paid where it complies with a simple instruction to vary. Such a proposition, which was advanced in paragraph 19A of the Basell defence, was not pursued. The third difficulty is that no procedure is stipulated for the determination of the issue whether an item of work or services is in fact a variation, for the valuation of this item or, indeed, for the adjustment of the contract price as a consequence. If any sense can be made of Articles 6.2 and 6.3 they appear to represent an attempt to place these matters in the decision of Basell, or of Sheddon Uhde acting as its agent and not as an independent contract administrator. In any event, the procedures under those articles were never invoked by any request by Basell for a written statement.
The case before me was presented by all parties on the basis that questions which might arise in variation claims fell to be decided by Sheddon Uhde as agent for Basell and that Basell would allow a reasonable adjustment to contract price in the event that a variation was ordered by Sheddon Uhde and performed. That the case was conducted in this way is partly due to the fact that, at the outset, counsel for AFS disavowed any reliance upon Article 6 on the basis that they could not hope to demonstrate that any work performed by AFS fell outside the very broad scope of the AFS contract. This was, as I have mentioned,[13] to pick up the splitter at Coffs Harbour, carry it to Geelong and unload it there. Nevertheless, as a fall-back position, and by amendment made by leave on 8 May 2007, further amended on 10 May, AFS propounds what it says is a true variation claim for the Bradshaw Haulage work. This is in addition to the four specific variations already pleaded. This Bradshaw variation claim is for $207,878.00 comprising three items. A consequence of the late introduction of this claim was that Basell did not have the opportunity to file a defence. I have, therefore, had regard to the matters raised by counsel for Basell at trial in order to identify the areas of dispute.
[13]See para [11] above.
Intertek Caleb Brett
This is the cost of a test carried out on the Devine barge at the direction of Basell's underwriter. Intertek invoice 2113 for $2,750.00 was passed to Basell together with a 10 per cent administration fee by AFS invoice 2725, making a total of $3,025.00 plus GST, totalling $3,327.50. The variation was accepted and I will allow it.
WESH
This is a claim for $92,316.35 for the work which was carried out by WESH in accordance with the arrangements agreed upon at the 28 September meeting. As pleaded, this was to "fabricate of all requirements for the setting of the [splitter] column within the barge". The amount sought is that claimed by WESH in its tax invoice 4597 where the work is described as "arranging the barging modifications". The claim under this invoice was passed by AFS to Basell in AFS invoice 4921 dated 15 December 2005.
A number of points were taken against this claim. First, insofar as it is a claim for reimbursement, AFS had not paid the amount sought by WESH and, given the 18 months which has since elapsed, it is unlikely to be called upon to do so. I would not see this as fatal if it were the case that AFS were liable for this amount.
Second, there was no agreement to reimburse AFS for its liability. This is correct but it is not to the point. Any obligation in Basell to pay for this work arises under Article 6. Construing Article 6 as I do, there is no obligation in Basell to pay for this work; it was part of the contract work so that there is no variation. Insofar as extra work was required for preparation or saddling, it was caused by the need to use the Austral barge. This was a matter for AFS.
Third, if it be variation work, it has not been proved that the charges related to that work and that they were fair and reasonable. All that is known is that WESH did some work and that it rendered an invoice. I reject this claim.
Bradshaw Haulage
This claim represents part of the Bradshaw Haulage invoice 2149 dated 11 November 2005 which was passed to Basell by AFS invoice 3520 of the same date. The amount claimed under this variation is made up as follows:
(i)
Movement of gantry
25,600.00
(ii)
Increased transport costs
47,880.00
(iii)
Standby at Coffs Harbour
115,500.00
188,980.00
GST
18,898.00
207,878.00
The first item was not in dispute. Sheddon Uhde requested that the gantry be sent to Coffs Harbour to enable the rotation of the splitter there and accepted the cost as an extra. In any event the gantry was not required.
The second item represents the costs claimed for work done as a consequence of the decisions made on 28 September 2005. This claim must address the difficulties which were fatal to the WESH variation. There is, however, in this case, further and determinative consideration. When Bradshaw Haulage indicated that its price would be revisited, Sheddon Uhde appeared to accept this. Details were asked for and provided to AFS on 6 October and passed to Mr Chang the following day. Mr O'Connor pressed Mr Chang for an acceptance on 9 October and again on 10 October. On the afternoon of 10 October Mr Chang instructed Mr O'Connor to proceed. In the circumstances, including the content of the preceding emails, this amounted to an acceptance by Basell's agent of the AFS proposal to carry out the work as a variation and for the varied price to be charged by Bradshaw Haulage. Mr O'Connor treated it as such and the work went ahead. There is no issue between AFS and Basell that Sheddon Uhde was authorised to agree this variation on behalf of its principal. I also treat this as an acceptance of the price variation and will allow the sum claimed.
The third item represents the cost of a Bradshaw Haulage truck standing by for 11 days at Coffs Harbour. This was between 12 October and 22 October when the splitter was loaded. The original program was for the splitter to arrive at the harbour just in time for loading. Mr Ride, however, instructed Bradshaw Haulage to collect the splitter from the WESH yard early, not later than 5 October. This was because of his concern that WESH might be in financial difficulties. The splitter was collected on 11 October. This meant that it was required to stand by at the port until the barge arrived ready to take it on board. It was not disputed that the $10,500 per day stand by fee which Bradshaw Haulage had quoted on 5 October was reasonable, so that the item is made out.
I therefore allow the Bradshaw Haulage variations in the sum of $207,878 in full.
Coffs Premier Security
This is a claim for security which was required when the truck with the valuable splitter on board was required to stand by at Coffs Harbour in accordance with Mr Ride's direction. The security was provided from 11 October when the truck arrived at the harbour until 7.00am on 24 October 2005. The barge left at 2.45pm on 25 October. Under the AFS contract the provision of security was the responsibility of AFS, but this expense may not have been required had the stand by been for the expected duration. In my view this is a proper extra which was the consequence of Mr Ride's early collection direction. The Coffs Premier Security invoice 251005CW in the sum of $17,200.77 was passed to Basell by AFS invoice 2745 together with a 10 per cent administration fee, making a total of $18,920.85. I will allow this variation in the sum of $18,920.85
Gibson Minto Aiton
This was not pressed.
Conclusion
I mention at this point that there were two other variations which were allowed and paid and may therefore be ignored for present purposes. The first was for the splitter insurance. The amount was the cost of the insurance, namely, $90,447.59, plus 5 per cent administration fee and GST. The second was for Martil Engineering which sought $27,537.18 for work ordered by Mr Nest. This latter sum was paid direct to Martil.
I conclude therefore that variations be allowed as follows:
Claim
Allow
1.
Intertek Caleb Brett
3,025.00
3,327.50
2
WESH
92,316.35
Nil
3
Bradshaw Haulage
207,878.00
207,878.00
4
Coffs Harbour Security
17,200.77
18,920.85
5
Gibson Minto Aiton
5,539.90
Nil
$230,126.35
The Basell Counterclaim
The remaining claim between AFS and Basell was the Basell counterclaim for the recovery of $1.1 million. When the barge was to be unloaded Austral demanded payment for its cartage and refused to permit the splitter to be unloaded unless this payment was made. Peter Douglas White, the Basell project engineer, then made a direct approach to Austral. He said, and I accept, that the consequences of any further delay in the delivery of the splitter to the project site would be very severe. He negotiated with Captain Lambert that the cargo would be released upon payment of $1 million plus GST. This payment was made and the splitter released.
The further consequence of this arrangement was that AFS was relieved pro tanto of its obligation to Austral. This is a benefit for which it could not in conscience resist giving credit to Basell on account of AFS liability. Counsel for AFS properly accepted that this was so if I found, as I have, that the AFS contract is not a fully reimbursable one.
I conclude from this that the set-off and counterclaim should succeed and that AFS should pay or give credit to Basell in the sum of $1.1 million.
Third Party Claim
Little was said at trial about the third party claim. Indeed, a good part of it was deferred to another day. In essence Basell contends that, if AFS is correct in its claim, then Sheddon Uhde exceeded its authority as Basell's agent.
As between Basell and Sheddon Uhde, it was common ground that the authority of Sheddon Uhde was not unlimited. By a statement of admitted facts which became Exhibit 15, Basell and Sheddon Uhde agreed as follows:
1.[Basell] concedes as a fact that it conferred upon Bruce Ride of [Sheddon Uhde] authority on behalf of [Basell] to contractually commit to and approve expenditure up to $100,000 in aggregate for transport costs of the splitter column for the upgrade of [Basell's] polypropylene plant at Geelong without the prior approval of [Basell].
2.[Sheddon Uhde] concedes as an admitted fact that it had no authority to commit [Basell] to expenditure to and for [AFS] or any sub-contractor of [AFS] in connection with the upgrade of [Basell's] polypropylene plant in Geelong otherwise than as provided in paragraph 1 of this statement of admitted facts and by entering into a lump sum contract with [AFS] for $611,800 on its behalf.
It follows from my findings that Sheddon Uhde committed Basell to the following expenditure over and above the contract price of $611,880:
Austral price adjustment 5,500.00[14] Variations 230,126.35 Insurance 94,969.97 Martil Engineering 27,537.18 $358,133.50 [14]Including GST
In its defence Sheddon Uhde alleges that Basell had authorised it to allow the insurance extra.[15] It would seem that no authority is asserted with respect to the balance of $263,163.53. Given the admitted cap on the authority to order variations, the amount in excess of this cap would be $163,163.53. The point taken with respect to this amount, or most of it, is that Basell suffered no loss because these were proper variations.
[15]Third party defence, para 18.1.
The question as to whether the claimed variations were in truth Article 6 variations involves a consideration of the question, whether the work done involved a change in the scope or manner of performance from that to be provided under the contract. The preference of Basell and Sheddon Uhde was that this matter be deferred to another day, but when I pointed out that decisions would have to be made on the AFS claims for variations, they accepted that the Bradshaw Haulage variations should be determined. These are the extra cost of sea freight caused by the engagement of Austral and the variations which I have summarised above[16] which are those in items (b), (c), (f), and (i) in paragraph 18A of Sheddon Uhde’s defence to the third party statement of claim. Remaining items in paragraph 18A have been deferred. I have set out the events that lie behind this Bradshaw variation. As to the first and third component it is clear that extra work outside the contractual scope was provided in order to meet the particular requirements of Basell or, perhaps, Sheddon Uhde. These are items (c) and (i) in paragraph 18A. The position with respect to the second component, item (b), is a little difficult. The sum represents $47,880.00[17] being the extra costs incurred by Bradshaw for rotating the splitter at Coffs Harbour and for other work which became necessary to accommodate the requirements of the Sea Tow barge.
[16]See para [69] above.
[17]I ignore the $5,000.00 kick back.
The first task is to identify the work which is said to constitute the variations. The pleadings shed little light on this. All that is known is that Bradshaw on 5 October 2005 revised its price from $110,380 to $163,260 the extra $47,880 was made up of $15,000 for rotating the splitter prior to loading and $32,880 for other matters.
In its email of 5 October, Bradshaw described the extra work as being the following items that “have contributed to our variation in price due to the change of barge”.
1.Unload the column at the Coff’s barge facility using bolt on saddle extensions.
2. Remove and reposition trailer to suit revised barge arrangement.
3. Load onto trailer and remove saddle extensions.
4. Resecure column to trailer.
5. The reverse above process at the Geelong end.
6.Costs due to third change in barge. Prelim work, study, drawings, correspondence, meetings etc.
The letter also mentions certain other items of work provided to enable the expedition of the delivery. No detail of these various items has been provided. Given the scope of works described in the contract[18], the rotation of the splitter was a matter which was part of the scope of works. I presume that the reason for the allowance of the cost of transporting the gantry to Coffs Harbour was because the contract does not specify where the rotation was to take place. There is no evidence that the performance of rotation at Coffs Harbour was more costly than would have been the case had it been done at Corio. This item was, therefore, not beyond the scope of works and is not a true variation.
[18]See para[11] above
The remaining item was to do with the special difficulties of loading the splitter on the Sea Tow barge. All of this may be a variation under the Bradshaw contract, it is a matter within the scope of works provided for in the AFS contract. Work is therefore not a true variation to that contract.
I therefore conclude that items (c) and (i) in paragraph 18A of the Sheddon Uhde defence to the third party statement of claim are proper variations for which it was appropriate for AFS to claim extra payment and for Sheddon Uhde to approve the extra payment. No issue was taken as to the quantum of these claims and I accept them as proper. With respect to items (a) and (b), I conclude that these are not variations within the meaning of Article 6. Since no other basis was advanced by Sheddon Uhde to warrant their allowance, I must conclude that, as between Sheddon Uhde and Basell, AFS was not entitled to an adjustment of the contract price for this work.
The final item for my determination is item (f) in paragraph 18A which refers to the claim for $17,200.77 for Coffs security. This is a true variation for reasons which I have set out above.[19] The amount which I allow is $18,920.85
[19]See para [74] above
These conclusions mean that, of the Bradshaw variations, $141,100 plus GST, a total of $155,210, was a proper variation within in the meaning of Article 6.
I did not receive argument as to the authority for the insurance payment. The Martil Engineering account was paid directly by Basell on the recommendation of Sheddon Uhde.
In the circumstances I will not attempt to reach a final conclusion as to the matters remaining in dispute without giving to counsel the opportunity to present further argument.
Conclusions
The result of all of this is that the entitlement to AFS under the AFS contract is as follows:
Contract Price
GST
611,880.00
61,188.00Adjustments
Austral
VariationsAdjusted Price
5,500.00
230,126.35908,694.35
Less Paid
AFS – 29 September
– 3 October
– 6 October
– 6 October55,000.00
211,750.00
213,400.00
53,350.00(533,500.00)
To Austral Direct
(1,100,000.00)
Balance Due (724,805.65)
I will hear counsel further as to the orders which should be made to give effect to these conclusions.
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