Permasteelisa Pty Ltd v Four Seas Network Pty Ltd

[2000] NSWCA 98

CITATION:	PERMASTEELISA PTY LTD v FOUR SEAS NETWORK PTY LTD [2000] NSWCA 98
FILE NUMBER(S):	CA 40586/98
HEARING DATE(S):	16 March 2000
JUDGMENT DATE:	18 April 2000
PARTIES :	PERMASTEELISA PTY LTD v FOUR SEAS NETWORK PTY LTD
JUDGMENT OF:	Mason P at 1; Priestley JA at 45; Meagher JA at 46

LOWER COURT JURISDICTION :	Commercial Division
LOWER COURT FILE NUMBER(S) :	CD 40214/97
LOWER COURT JUDICIAL OFFICER :	Bainton J

COUNSEL:	Appellant: M H Tobias QC/ D H Murr SC Respondent: P M Jacobson QC/ J D Smith
SOLICITORS:	Appellant: Maurice Marshan Respondent: Benjafield Milne
CATCHWORDS:	Contract - invitation to tender - repudiation by inactivity - lobbyist's entitlement to commission - maintenance of the basic conditions of the first tender proposal - departure between first and second tender proposals. (ND)
DECISION:	Appeal dismissed with costs

THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40586/98


MASON P
PRIESTLEY JA
MEAGHER JA

Tuesday 18 April 2000



PERMASTEELISA PTY LTD v FOUR SEAS NETWORK PTY LTD

JUDGMENT

1    MASON P: The respondent was described by the trial judge, Bainton J, as a lobbyist. It is a company through which two men called Benny Leung and Noel Ling carry on their business, mainly in China. That business includes negotiating and lobbying for contracts. 2    The appellant manufactures prefabricated building components, especially the curtain walls or outside cladding of high-rise buildings. In 1996 its managing director was Mr Lucio Mafessanti. 3    In 1995 the appellant commenced to supply cladding for a project called King Tower in Shanghai. By February 1996 there was a dispute between the building owner and the appellant concerning the appellant’s performance, although work resumed in July 1996. 4    In March-April 1996 the appellant prepared tenders for a second Shanghai project known as the Metals Exchange Building, but that eventually came to nothing by October 1996. 5    This appeal concerns a third project in Shanghai, known as the COSCO building. 6    It was never in dispute that a commission agency contract relating to the COSCO project was entered into between the parties in April 1996. There were discussions which culminated in a letter dated 22 April 1996 drafted by the appellant and signed by representatives of the parties. The letter is in the following terms:

This is to confirm that Permasteelisa Pty Ltd has agreed:
1. To pay [the respondent] 7% of the contract price as commission for works to be carried out on the “COSCO building of Shanghai” project.
2. The commission will be payable on pro-rata basis on receipt of progress payment for the project with the last payment to be done at last project payment or retention release.
3. Any pre paid expense for the project shall be deducted from the first payment of the commission.
4. All the above clauses apply only if the basic conditions as per our tender proposal are maintained in the definitive letter of award and/or contract for the project.

7    The letter is silent as to the work to be done by the respondent to earn its commission. However, the parties agree that it included the use of best endeavours on the respondent’s part to assist the appellant in securing the COSCO contract with the building owner, Shanghai Ocean Shipping Building Co Ltd (“SIUBCL”, an abbreviation used by the parties). 8    It was not until 5 February 1997 that tenders were called for the work on the COSCO building. The appellant was invited to tender. By this stage the appellant had claimed in a number of letters and faxes to the respondent that the commission agency agreement had been called off for largely unspecified reasons. The respondent was contending otherwise, repeatedly asserting that the commission contract stood and offering assistance if wanted. 9    The appellant submitted its first COSCO tender on 25 March 1997. The offer price was US $18,588,950 fixed for 90 days. Several revised offers followed in April-June 1997. The appellant was negotiating directly with representatives or contractors of SIUBCL. The appellant's final price was US $17, 000, 000, offered on 27 June 1997. This offer was accepted and a Letter of Award issued on 28 June 1997 followed by formal contracts on 9 September 1997. 10    The learned trial judge found that the respondent had performed its obligations in such a manner as to earn its agreed commission. He made a declaration that the appellant was liable to pay commission in accordance with the agreement of 22 April 1996. Ancillary orders were made. 11    Bainton J found that the respondent had made a contribution during the important period commencing 5 February 1997 when invitations to tender for the COSCO project were issued. The respondent provided useful advice about one of the appellant's tender competitors (see RB 33P). This finding is not challenged in the appeal. It probably would not matter if it were, because the appellant was stopping its ears to all offers of assistance from the respondent from late 1996 onwards.

Repudiation

12    The appellant submits that the respondent’s offers of help and actual help were in vain because the commission agency contract had already been terminated by the appellant on 8 October 1996. Termination was (so the appellant contends) in consequence of the respondent's repudiation by inactivity from July to October 1996. 13    The appellant pleaded that after June 1996 or thereabouts the respondent failed to provide any assistance or other services to enable the appellant to obtain a contract for the project; that the appellant was thereby discharged from any performance of its obligations under the contract; and that by letter dated 8 October 1996 the appellant accepted the respondent’s failure and terminated the contract (Points of Defence par 6). 14    This reads like an allegation of fundamental breach of terms which (at their very highest) would have been implied. However, the written submissions on appeal assert that the respondent’s non-activity from July to October 1996 constituted a repudiation. Implicit in those submissions is the contention that the respondent should have been doing something referable to the COSCO project during this critical period. 15    In his oral submissions, senior counsel for the appellant sought to put a more specific complaint and to amend the notice of appeal accordingly. It was submitted that the trial judge should have accepted the evidence of Mr Mafessanti (Blue Book 72) that at different times in June or July 1996 both Mr Ling and Mr Leung said words to the effect that “Due to the situation on the King Tower project, we do not want to support your organisation any longer”. This is quite different to repudiation by inactivity, although (if accepted) could be evidence of the same. I would refuse leave to amend. The application should have been made well before the day of the hearing, the specific point was not addressed in written submissions, and the point was hopeless in any event. The conversation was denied by Ling and Leung whose evidence was accepted, in contrast to the evidence of Mr Mafessanti. The probabilities clearly support the respondent because there was a stream of faxes during this period in which the respondent continued to offer help in resolving the King Tower problems. True, the respondent was at pains to point out that the appellant was the author of its own misfortunes. But that is far short of saying that the respondent was not prepared to continue attempts to rescue the King Tower situation. Its 1996 correspondence at all times asserted as much. It was in the respondent’s interest to assist, because the appellant’s reputation re King Tower could affect its prospects of getting the COSCO contract. 16    I return to the issue of repudiation by inactivity during July-October 1996. The parties agree that the legal principles are as stated in Laurinda Pty Ltd v Copalaba Park Shopping Centre Pty Ltd (1989) 166 CLR 623, especially in the judgment of Brennan J who said (at 647-8):

Repudiation is not ascertained by an inquiry into the subjective state of mind of the party in default; it is to be found in the conduct, whether verbal or other, of the party in default which conveys to the other party the defaulting party’s inability to perform the contract or promise or his intention not to perform it or to fulfil it only in a manner substantially inconsistent with his obligations and not in any other way. … The question whether an inference of repudiation should be drawn merely from continued failure to perform requires an evaluation of the delay from the standpoint of the innocent party. Would a reasonable person in the shoes of the innocent party clearly infer that the other party would not be bound by the contract or would fulfil it only in a manner substantially inconsistent with that party’s obligations and in no other way?

17    Applying this principle, the appellant’s case on repudiation fails comprehensively, for the following reasons:

(a) There were two similar commission agreements between the parties, each finalised by separate letters of 22 April 1996. One related to COSCO. The other related to the Metals Exchange Building.
(b) There were no developments as regards the COSCO building in mid 1996 because tenders had not yet been called for. On 6 May 1996 the respondent and the appellant exchanged faxes, principally about the Metals Exchange Building. The respondent’s fax stated that “For COSCO building, nothing has been developed yet since last time we had a meeting on Shanghai” and the appellant did not demur to this. The active dealings between the parties in May, June and August 1996 were concerned with the Metal Exchange Building and the problems associated with the King Tower project. The respondent was wisely concentrating on those matters and no complaint was being made about non-activity with respect to COSCO.
(c) Mr Leung attended a meeting in Shanghai in early August 1996 with Mr Shen and Mr Le (the general manager of the COSCO developer). Mr Le told them that the appellant had been on the official list of COSCO tenderers since its introduction earlier in 1996. Strangely, this information was not passed on to the appellant at the time, but that alone was not a repudiation in the circumstances.
(d) On 8 October 1996 the appellant purported to terminate its contractual arrangements with the respondent referable to each of the Metal Exchange Building and COSCO projects. The former termination was stated to be in consequence of the recent termination of the appellant’s own involvement with the Metal Exchange Building project. The latter termination is explained (if that is the word) in the following letter:
RE: COSCO BUILDING SHANGHAI PROJECT
Dear sir
Please be informed that we wish to terminate our involvement with your organisation on the above mentioned tender project.
As a consequence, we hereby advise that the Agreement for the COSCO building of Shanghai made between our organisation and Permasteelisa Pty Ltd signed on April 22, 1996 is no longer valid, and Permasteelisa Pty Ltd is no longer liable of any kind of commission with you or your organisation for the above project.
Thank you for your participation.
Yours faithfully,
Lucio Mafessanti

Managing Director

(e) The absence of reasons for what was a clear repudiation on the appellant’s part was a pregnant yet deafening silence. The appellant made no complaint about the respondent’s COSCO activities because there was no basis for complaint. The parties always realised that the COSCO job would go to tender, the appellant was on the tender list, and the time for intensive lobbying by the respondent lay in the future.
(f) The parties appreciated that success in the COSCO project might be affected by developments in the other two Shanghai projects. There were dark clouds on the King Tower horizon because a dispute had emerged and the appellant had stopped work in February 1996, only resuming in July. Tenders were called in connection with the Metals Exchange Building project on 6 May 1996. The respondent worked as necessary for the appellant in relation to these two ventures in mid-late 1996. There simply was no cause for much work to be done concerning COSCO at this time.

Was Clause 4 satisfied?

18    The second submission by the appellant relates to clause 4 of the letter of 22 April 1996 (par 6, above). It is submitted that no entitlement to commission arose because the basic conditions of the appellant’s first tender proposal were not maintained in either the letter of award or project contract. 19    Bainton J held that the absence of a tender proposal for the COSCO building in April 1996 meant that there were two choices in interpreting clause 4. Either (a) it converted the agreement into what was no better than an option which could be held open until the respondent’s lobbying had succeeded; or (b) clause 4 was talking in the present tense, and, since there was then no current tender proposal, clause 4 had no operation. Construing the clause contra proferentem his Honour adopted the second possibility. 20    The respondent did not seek to support this construction. I agree that one cannot overcome the ambiguity and uncertainty of clause 4 by treating it as void for uncertainty (cf Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 at 436-7). 21 As indicated above, the appellant submitted a number of tenders between 25 March 1997 and 27 June 1997. The tender documents were prepared in Sydney, based upon specifications and contract documents made available in Shanghai by the prospective COSCO client, SIUBCL. 22 After submission of the original tender there were further negotiations between the appellant and the COSCO client. In the main, these were conducted by people at the appellant’s Shanghai office and without reference to the respondent. The appellant was steadfast throughout 1997 that it had terminated its relationship with the respondent, it did not involve the respondent in any way, and it spurned all offers of assistance from the respondent. 23 The negotiations were evidenced in part by a series of letters from the appellant to SIUBCL. The initial tender (on 25 March 1997) quoted a price of US$18,588,950 fixed for 90 days. The tender set out items of inclusion and exclusion, referred to the origin of building materials, and stipulated financial parameters in the following terms:

6. COMMERCIAL CONSIDERATION
All the contract conditions terms in tender documents are subject to further negotiation/agreement.
This offer is subject to the following commercial and contractual considerations.
- No performance bond.
- 10% advance payment against bank guarantee.
- Retention to be limited to 5% of our contract sum and in the form of bank guarantee.
- Release of retention to be 50% at completion of our works and remaining 50% 12 month later.
- Payment by letter of credit required for imported materials at sight of bill of landing.
- Monthly offsite payments for assembled components ready for delivery to the site and for major materials such as glass, extrusions and sheet.
- Monthly payments for installed components.
- All commercial and contractual matters to be agreed upon.

24    There were interviews in Shanghai, followed by revised tenders and written variations. Some changes reflected alterations to design specifications dictated by SIUBCL. Others reflected the give and take of bargaining. 25    What became the final (and accepted) tender was sent on 27 June 1997. The final price had become US$17 million. However, variations to the original contract works which were costed at US$2,455,820 meant that the original tender price was effectively reduced by over US$4 million. The appellant’s initial proposal that there should be no performance bond had been rejected and such a bond was now included at an effective cost to the appellant of US$34,652. There were other changes, to the appellant’s disadvantage. It is common ground that the effect of the renegotiations was substantial in monetary terms. 26    The letter of 22 April 1996 was drafted by the appellant’s managing director, Mr Mafessanti. It does not purport to embody the whole terms of the agreement previously discussed and negotiated. For example, it does not really explain what the respondent was to do to earn its commission. This said, the written terms would override any previously discussed terms that were inconsistent. 27    There is no evidence of discussion directly referable to clause 4. It appears to have been the brainchild of Mr Mafessanti, inserted at the last minute in a not improper attempt to contain the appellant’s exposure. 28    As indicated, the parties agree that clause 4 is not void for uncertainty. Nor is it incapable of application to the situation in which the parties found themselves in April 1996. 29    The appellant’s submission is simple: clause 4 of the contract was engaged and no commission was payable because comparison between sum quoted in the original tender and the contract price reflected in the accepted final tender showed that “the basic conditions” were definitely not “maintained”, thereby breaching clause 4. 30    The respondent’s submission is equally simple: the sum quoted in the ultimate tender (which was accepted) was the same as that in the letter of award and project contract, thereby satisfying clause 4. 31    The dispute therefore turns upon the meaning of “the basic conditions as per our tender proposal”. 32    What then is the fair meaning of the clause, construing it in its context and having regard to what both parties must have had in contemplation when they were negotiating and forming their agreement? 33    It must be acknowledged that clause 4 was inserted to provide some protection for the appellant by relieving it of the obligation to pay any commission in the event that the contract awarded or entered into was disadvantageous in its basic conditions from that proposed in the appellant’s tender. This would be the case notwithstanding that such final contract was one which the appellant would (reluctantly) be prepared to enter. 34    Before us the parties agreed that price was one of the “basic conditions”. 35    Clause 4 and the antecedent discussions show that the parties contemplated that the COSCO project would go to tender in the future. There were other suppliers of the relevant cladding. Accordingly, it was known that there would be a tender list to which the appellant’s name would hopefully be added. Mr Ling told Mr Mafessanti that COSCO would be the third tallest building in Shanghai and that a lot of companies would fight to get the project. 36    One of the services offered by the respondent was advice as to its competitors’ prices. (How these would become known was not discussed.) It is reasonable to conclude that the parties contemplated that this information might only become available after competitors had lodged their initial tenders, with the likely consequence that matching or improved tenders from the appellant could be required. (This in fact came about, in 1997, when the respondent passed on information about one of the competitors’ building supply practices (Blue AB 20)). 37    The trial judge was therefore quite correct in holding that Mr Mafessanti knew from February 1996 onwards that the appellant had to compete with other interested tenderers and that the respondent’s lobbying task was to be directed to assisting the appellant to succeed with its competitive tender (RB 27). 38    The 7% rate of commission was negotiated in response to Mr Ling’s assertion that curtain wall contracts for buildings normally had a 25% to 35% profit. There may have been an element of overstatement, but the point is that the commission was negotiated as a percentage of what the parties expected would be a price with a good profit margin. (The ultimately tendered price of US$17 million produced a profit of 26% on direct costs.) How good the expected profit would be was a matter for the appellant in the ultimate resort. So long as it acted in good faith it could walk away from a deal if the ultimate price was not to its liking. 39    If the appellant is right, even a fairly small departure between first and second tender could still leave a very profitable contract brought about as the result of significant contribution by the respondent. It is easy to envisage the injustice to the respondent that would flow from the appellant’s construction, and for that reason alone the Court should hesitate before reaching such construction when the clause was drawn by Mr Mafessanti. 40    It remains difficult to envisage exactly what the parties had in mind as the paradigm situation that would attract clause 4’s operation. But I do not think that they envisaged that any right to commission would be lost automatically merely because the appellant’s first and (from its point of view) best proposal was not accepted. It is here that the context is significant. This was a project in which there would be competitive tenders and where both sides could seriously have anticipated that the contract might not be won on the first bid. One of the respondent’s functions was to find out about other bids and other bidders, thereby enabling the appellant (if it chose) to revise its own earlier bid. There was an expectation that the ultimate contract would be a profitable one, ie containing sufficient fat to allow some leeway. In any event the appellant would remain master of the situation and, in the event that it chose to enter into the ultimate contract, its commission obligation was payable as a percentage of the contract price and not as a lump sum. Like Bainton J, I would take judicial notice of the fact that people in commerce may ask for more than they expect to receive so that they can negotiate down to what is reasonable and practicable. After all, this was not going to be a sudden-death tender conducted according to guidelines for government tendering supervised by the Auditor General for New South Wales. 41    For these reasons I would conclude that clause 4 was not engaged merely because the appellant’s first tender proposal was not accepted. The pressure of the market place forced it to revise its offer and thereby to reduce its profit margin. But it ultimately secured a letter of award and a final contract that was consonant with its own tender proposal of 27 June 1997. This was sufficient to satisfy both the spirit and letter of clause 4. 42    This approach to clause 4 still leaves it with some work to do, albeit slender. Had the appellant submitted its “final” tender, received a counter-offer and (acting in good faith) accepted it, then as presently advised I would have concluded that commission was not payable. 43    Bainton J suggested that the same result may come by a different route. As indicated above, the appellant’s first tender proposal of 25 March 1997 stipulated that “all the contractual conditions/terms in tender documents are subject to further negotiation/agreement”. This stipulation is found at the commencement of Pt 6 (Commercial Consideration) of the tender proposal which is part of a series of stipulations that address price. It may well be that the price offered in the final tender proposal was technically one that “maintained” the basic conditions of the original tender. I find it unnecessary to determine this point, but it has a certain attractiveness. 44    The appeal should be dismissed with costs. 45    PRIESTLEY JA: I agree with Mason P. 46    MEAGHER JA: I agree with Mason P.

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