Stork Electrical P/L v Leighton Contractors P/L
[2000] QCA 517
•20 December 2000
SUPREME COURT OF QUEENSLAND
CITATION: Stork Electrical P/L v Leighton Contractors P/L & Anor [2000] QCA 517 PARTIES: STORK ELECTRICAL PTY LTD ACN 001 102 516
(plaintiff/respondent)
v
LEIGHTON CONTRACTORS PTY LTD
ACN 000 893 667
(first defendant/first appellant)
GREG SPARKMAN
(second defendant/second appellant)FILE NO/S: Appeal No 3142 of 2000
SC No 932 of 1995DIVISION: Court of Appeal PROCEEDING: General civil appeal ORIGINATING COURT: Supreme Court at Brisbane
DELIVERED ON: 20 December 2000 DELIVERED AT: Brisbane HEARING DATE: 30 November 2000 JUDGES: de Jersey CJ, Thomas JA, Williams J
Separate reasons for judgment of each member of the Court, de Jersey CJ and Williams J concurring as to the orders made, Thomas JA dissenting.
ORDER: Appeal allowed.
Set aside orders made on 15 March 2000, including as to costs.
Answer the questions posed for preliminary determination as follows:Question 1(a)(i)(ii): “No.”
Question 1(b)(i)(ii): “No.”Question 2: “Unnecessary to answer.”
Order the respondent to pay the appellants’ costs, of the appeal and of the hearing at first instance, to be assessed.
CATCHWORDS: EQUITY – TRUSTS AND TRUSTEES – POWERS, DUTIES, RIGHTS AND LIABILITIES OF TRUSTEES – LIABILITY FOR BREACH OF TRUST – WHAT CONSTITUTES A BREACH OF TRUST AND WHO MAY BE LIABLE – respondent subcontractor alleged first appellant contractor acted in breach of trust – trust established in matrix of construction contracts including principal and first appellant contractor, for the benefit of subcontractors including the respondent, implementing covenants in the head contract – whether the parties to the head contract were entitled to vary the head contract where this purportedly varied the scope of operation of and property subject to the trust – effect of variation on the respondent – first appellant’s duty as trustee
EQUITY – TRUSTS AND TRUSTEES – CONSTITUTION AND CLASSIFICATION OF TRUSTS GENERALLY – CLASSIFICATION OF TRUSTS IN GENERAL – number, nature and ambit of trust(s)
CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – OTHER MATTERS – intention of parties to head contract – whether trust arrangement intended to endure for life of contract – where variation envisaged in contract – where tripartite agreement included provision that the principal owed no obligation to subcontractors – where provisions of draft trust deed allowed for nomination of early “vesting date” – construction of those provisions – where under subcontract first appellant was obliged to meet payments due to respondent regardless of whether it received payments from the other party to the contract
Property Law Act 1974, s 55
Boardman v Phipps [1967] 2 AC 46, referred to
Consul Developments Pty Ltd v DPC Estates Ltd (1975) 132 CLR 373, referred to
Elder’s Trustee and Executor Company Ltd v Symon [1934] SASR 435, referred to
Fenwick v Greenwell (1847) 10 Beav 412; 50 ER 640, cited
Hordern v Hordern [1910] AC 465, referred to
Loch v Westpac Banking Corporation & Ors (1991) 25 NSWLR 593, considered
Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149, cited
Phipps v Boardman [1967] 2 AC 46, referred to
Re Brogden (1888) 38 Ch D 546, cited
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, considered
Warman International Ltd v Dwyer (1994-5) 182 CLR 544, referred to
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363, consideredCOUNSEL: DF Jackson QC, with PM Donohoe QC and J Stuckey-Clarke for the appellant
PH Morrison QC with GH Brandis for the respondentSOLICITORS: Blake Dawson Waldron for the appellant
Gadens Lawyers for the respondent
de JERSEY CJ: The essential issue may be expressed in this way. In the context of expansive commercial dealings, A and B establish a trust for the potential benefit of entities including C. A and B do so in order to implement covenants in a precedent contract between themselves, that is, between A and B. They formulate the terms of the trust by reference to the terms of the contract. That contract in terms recognises what would otherwise be assumed, that is, a general power in A and B consensually to vary its terms. By so varying relevant terms of the contract, can A and B, in the absence of the consent of C, effectually vary the scope of operation of and property subject to the trust? The learned primary judge held that they could not, and the appellants challenge that conclusion. Its correctness depends, plainly enough, on the question of what A and B intended.
By formulating the issue in those rather stark terms, I am not of course to be taken as excluding the significance of a number of other related factual and legal considerations. But that is the essential issue. How does it arise?
The State of Queensland appointed the first appellant (“Leighton”) as managing contractor in relation to the Brisbane Convention and Exhibition Centre project. (The second appellant, Mr Sparkman, was one of Leighton’s senior officers.) The relevant contract, dated 23 May 1994, and styled the “Managing Contractor Contract”, was a lump sum contract. It provided for a “guaranteed maximum price” of $138.4m to cover all moneys payable by the State to Leighton, including sums payable by Leighton to its subcontractors.
The respondent (“Stork”) was Leighton’s electrical subcontractor, under a subcontract dated 1 March 1994. Stork carried out work pursuant to that subcontract, for which it received substantial payment. There is however a residual outstanding claim for unpaid moneys, with the possibility of cross claims.
The Managing Contractor Contract set up a mechanism to secure payments to subcontractors. It annexed a draft trust deed. That draft contemplated that the State (as “principal”) open a trust bank account in the name of Leighton (as “manager”). Leighton would be the sole authorised signatory and operator of the account. The State would pay into the trust account all moneys payable under clause 16.2(c) of the Managing Contractor Contract. The manager would then hold those moneys on trust for the “beneficiaries”, which included the subcontractors. The beneficiaries would not be entitled to any specific portion of the fund, but would be entitled to have the trust administered in accordance with the deed. The fund would be subject to audit on behalf of the State. Leighton would be entitled to make payments from the account to beneficiaries.
Clause 16.2(c) of the Managing Contractor Contract specified the amounts intended to be paid by the State as principal into that trust account. They included amounts payable to subcontractors (by Leighton), as confirmed – in the usual way – through the issue of progress certificates. It may be important to note the context of that clause.
Clause 16.1 provided:
“The Principal shall pay the Manager as follows:
(a)the Construction Costs progressively in monthly instalments having regard to the Contract value of the Construction Work that has been carried out and incorporated in the Works;
(b)the Design costs in monthly instalments having regard to the Contract value of the Design Work that has been carried out;
(c)the Preliminaries Fee progressively in the monthly instalments set out in Annexure One; and
(d)the Management Fee progressively in the monthly instalments set out in Annexure One.”
(The “Construction Costs” are defined relevantly (by cl.1.1) as including “the amounts properly and actually incurred and payable by the Manager to the Sub-Contractors … ”.)
Clause 16.2 then provided for progressive certification of the amounts due to Leighton, and for diversion of the amounts due to subcontractors into the trust account:
“The Manager shall submit to the Principal’s Representative a detailed statement every month on the date stated in Annexure One and within twenty-eight (28) days after the Date of Practical Completion, in a form satisfactory to the Principal’s Representative, which shows:
(a)shows [sic] the amount payable to the Manager for the Construction Costs, Design Costs, Preliminaries Fee and the Management Fee in accordance with sub-clause 16.1; and
(b)the Guaranteed Maximum Price at the date of the statement.
Within fourteen (14) days after the receipt by the Principal’s Representative of such a statement or, if the Manager fails to submit any such statement, at such time as the Principal’s Representative thinks fit, the Principal’s Representative shall determine the amount payable to the Manager and (subject to sub-clause 16.5) issue a progress certificate showing the amount payable to the manager including (without limitation), the amounts payable to the Consultants and the Sub-Contractors.
The payment of moneys due under a progress certificate shall be made by the Principal within twenty one (21) days after the issue of that progress certificate as follows:
(c)the Principal shall pay the amounts payable to the Consultants into the bank account set up by the Manager pursuant to the Trust Deed; and
(d)the Principal shall pay the Manager the balance of the amount specified by that progress certificate.
…”
Clause 16.4 foresaw execution of the annexed draft trust deed which envisaged the establishment of the trust bank account into which the State would pay amounts due to subcontractors:
“The Manager shall execute the Trust Deed and shall thereafter deliver an executed copy thereof to the Principal’s Representative within seven (7) days of the date of acceptance of tender. The execution of the Trust Deed by the Manager within this time period is a fundamental obligation of the Manager under this Contract. If the Manager fails to comply with this obligation this shall be deemed to constitute a fundamental breach going to the root of the Contract. All amounts which are payable by the Manager to the Consultants and the Sub-Contractors are to be paid by the Principal into the bank account which is set up by the Manager pursuant to the Trust Deed and shall be held by the Manager on trust for the Consultants and the Sub-Contractors in accordance with the terms of the Trust Deed.”
(The question arose on the hearing of the appeal whether, in referring to “all amounts … payable by the manager to … the subcontractors”, clause 16.4 contemplated payments other than those certified as referred to in clause 16.2. Reading clause 16 as a whole indicates that clause 16.4 is referring to the same amounts as are covered by clause 16.2. That is also consistent with the terms of the draft trust deed annexed to the contract: see clause 2.2 especially. This issue is arguably relevant to the determination of the appeal, although not critically so on my analysis.)
Leighton and the State executed the trust deed, which is dated 19 April l993, with terms materially the same as those of the draft annexed to the Managing Contractor Contract. Consistently therefore with that annexed contract, the executed trust deed provided as follows:
“1. Trust Account
The Principal shall open a trust bank account in the name of the manager styled “Brisbane Convention and Exhibition Centre Beneficiaries Trust Account” (“the Trust Account”) at the branch of the bank named in Item 2 of the Schedule. The Manager will be the sole signatory to the Trust Account, and shall be empowered to operate on the Trust Account pursuant to the provisions of this Deed.
2. Trust Property
2.1The Principal shall open the account referred in Clause 1 with a deposit of Ten Dollars ($10.00) which, together with any future payments into the account shall be held by the Manager as trustee on trust for the benefit of the Beneficiaries from time to time and on the terms and conditions of this Deed until disbursement. These moneys may only be disbursed in accordance with this Deed and (subject to Clauses 3 and 4) only in favour of the Beneficiaries. The Manager acknowledges and agrees that (subject to Clauses 3 and 4) it does not have and will not have a beneficial interest in the funds contained in the Trust Account (the “Trust Fund”).
2.2The Principal shall pay all money which is payable under subparagraph (c) of sub-clause 16.2 of the Contract into the Trust Account to be held on the above trust.
2.3Each of the Beneficiaries shall have a beneficial entitlement to ensure that this Deed is administered in accordance with its terms, but none of the Beneficiaries shall be entitled to a specific portion of the Trust Fund, save in accordance with Clause 6 hereof.
2.4No part of the Trust Fund or the income therefrom shall be held for the benefit of, ever revert to, or be held in trust for the Principal or its estate.
3. Payments out of Trust Account
3.1 The person referred to in Item 3 of the Schedule (“the Principal’s Representative”) shall provide an independent audit of the Trust Account and shall report thereon to the Principal. Where pursuant to the terms of any of the agreements between the Manager and one of the Beneficiaries, the Manager becomes entitled to the payment of money by any of the Beneficiaries or to deduct any money from moneys which are then or will thereafter become payable to any of the Beneficiaries, such moneys may be paid to the Manager out of the Trust Account provided that:
(a)an authorised officer of the Manager provides the Principal’s Representative with a statement setting out the relevant details and particulars giving rise to the Manager’s entitlement to these moneys; and
(b)the Principal’s Representative certifies that on the basis of the statement provided by the Manager he believes that such moneys are due and owing by the relevant beneficiary to the Manager.
3.2The Manager shall be entitled to make payments to the Beneficiaries from the Trust Account.
Payments to Stork for its work were thereafter made via the trust bank account. Then on 22 December 1994, the State and Leighton executed a deed which importantly varied the Managing Contractor Contract. The State agreed to increase Leighton’s lump sum entitlement by some $40m to $178m. (There is no suggestion that there was no sufficient commercial reason for that.) The amended deed, styled “Deed of Variation No 2”, deleted clause 16.4 in its original form and substituted a new clause which did not oblige the State to pay into the trust bank account amounts destined for subcontractors. The terms of the new clause 16.4 follow:
“The Manager shall be responsible for all payments to Sub-Contractors and Consultants. Such payment may be made by the Manager through the Trust Account set up pursuant to the Trust Deed and the Manager acknowledges that the Principal shall have no responsibility to make any further payments to the Trust Account for this purpose.”
Cl 16.1 and 16.2 also were deleted.
In the result, subcontractors prospectively lost the security of having the State pay amounts destined for them into the trust bank account, and their entitlement to have the trust covering those funds administered in accordance with the deed. They additionally lost the benefit of the State’s independent audit responsibility.
Stork was not party to that variation. In an action commenced in the court for recovery of substantial amounts allegedly owing by Leighton, Stork also raised the issue of the lawfulness of the variation, insofar as it bore on the trust. On the application of Stork, and notwithstanding what might be described as mild opposition on the part of Leighton, a learned judge made orders for the preliminary determination of that latter issue. He ordered:
“1. That the following question be tried as a preliminary issue prior to the main trial of the action, namely whether [Leighton], by its conduct in:
(a)entering into an agreement with the Crown in right of the State [of Queensland] on 22 December 1994, entitled “Deed of Variation (No 2)”, which varied the terms of the Managing Contractor Contract made on 23 May 1994 in several respects and, in particular, deleted clause 16.4 of the Managing Contractor Contract and substituted new terms; or
(b)giving effect to the Deed of Variation, insofar as it varied clause 16.4 of the Managing Contractor Contract;
acted in breach of the trusts in favour of persons and entities (including [Stork]) falling within the definition of “Beneficiaries” in the Trust Deed, Annexure 6 to the Managing Contractor Contract, created by:
(i) the Trust Deed; or
(ii) clause 16.2(c) of the Managing Contract
2.Further, to the extent the matters raised by them are not already the subject of the above question, that the following questions also be tried as preliminary issues together with the question paragraph 1 hereof, namely:
(a)Was the trust referred to in paragraph 5 of the Further Amended Statement of Claim constituted, and if so when?
(b)(i) Was the following property trust property:
A.such funds as might be deposited in the Trust Account from time to time?
B. Some other property?
(ii) If the answer to Question 2(b)(i) is “yes”:
A. What was that property?
B. When did it become trust property?
(c)Were the relevant terms of the trust created by the Trust Deed referred to in paragraph 5 of the Further Amended Statement of Claim those alleged in paragraph 6 of the Further Amended Statement of Claim?
(d)Were the duties imposed by the trust upon the First Defendant those alleged in paragraph 53 of the Further Amended Statement of Claim?
(e)Did the First Defendant breach the said duties or any of them as alleged in paragraphs 61 to 64 (inclusive) of the Further Amended Statement of Claim?”
Following the hearing of the preliminary issue, the learned primary judge answered “yes” to each of question 1(a)(i)(ii) and question 1(b)(i)(ii). She took the view that it was then unnecessary for her to answer question 2.
Central to Her Honour’s conclusion was the view that “the trust created in favour of the beneficiaries was not intended to be revocable, at least not without the knowledge and consent of the beneficiaries”. The trust may not have been revoked, but it is true to say that the extent of the subject property changed. Her Honour relied, in support of her view, on the authority of Warman International Ltd v Dwyer (1994-5) 182 CLR 544,563, where the High Court affirmed that a fiduciary may not profit from unauthorised use of his fiduciary position. That may of course be accepted. But there is here no suggestion that while the trust subsisted, in its originally agreed format until the variation in December 1994, Leighton breached any fiduciary obligation. The real issue is quite different – simply enough, whether Leighton and the State were entitled to vary the Managing Contractor Contract as they did with these ramifications for the trust in favour of the subcontractors.
The Managing Contractor Contract contained provision which envisaged that variation might occur. It is clause 21.6:
“Except as provided elsewhere in the Contract, none of the terms of the Contract shall be varied, waived, discharged or released either at law or in equity except with the prior consent in writing of the Principal in each instance …”
There is also of course the ordinary fundamental power consensually to vary contractual terms.
Was this a case where, having established this mechanism favourable to subcontractors, the arrangement was thereafter “set in stone”; or was it rather a case where, for whatever they may have perceived as a sufficient commercial or other reason, the State and Leighton may as here legitimately have exercised their usual power consensually to vary? Did the State and Leighton, so far as objectively ascertainable, intend that this arrangement, as originally structured, endure for the life of the Managing Contractor Contract; or should they be taken as having established this mechanism beneficial for subcontractors in order that it might subsist only so long as other relevant commercial interests did not in their estimation render its continued operation inappropriate?
It is convenient to deal at once with one feature which in my respectful view wrongly contributed, and apparently substantially, to the learned judge’s view that this power of variation was not available for exercise.
On 7 March 1994 the State, Leighton and Stork executed the only tripartite agreement involved in the matter. It was entitled “Subcontractor Deed of Covenant”, and significantly for the present, included clause 3(a) and (f) in the following terms:
“3. General Covenants and Acknowledgements
Notwithstanding any provision of the Contract or the Sub-Contract each of the Manager and the Sub-Contractor acknowledges and agrees for the benefit of the Principal that:
(a)they will duly and punctually perform their respective obligations under the Contract and the Sub-Contract;
…
(f)the Principal owes no obligation to the Sub-Contractor unless it otherwise agrees in accordance with this Deed.”
The appellant submitted that this provision supported its contention as to the capacity of the State to act to vary the terms of the trust without reference to Stork. (There was no agreement “otherwise”, in terms of (f).) The learned judge held that “because of this provision in the Deed of Covenant, if for no other reason, Stork’s consent would be needed to change or put an end to (the trust) obligations”. That conclusion unfortunately arose from a misreading of para (a), Her Honour observing that that paragraph provided that both the State and Leighton would perform their contractual obligations. As is clear, however, (a) relates only to such performance by Leighton and Stork. I accept the submission for Leighton, that the covenant in clause 3(f), especially with its appearing in that tripartite agreement, is a significant indication that in relation to the trust obligation, the State was not undertaking obligations which were immutable even if only for the duration of the Managing Contractor Contract.
There is a substantial additional indication, in the draft trust deed annexed to the Managing Contractor Contract, that the trust was not intended necessarily to endure indefinitely. It is to the draft deed annexed to the contract. I refer to that draft because it arguably provides a more reliable indication of the intent than even the deed executed by way of implementation of the contract: one should primarily refer to the contract to discern the intent of the parties. It is of course the fact, however, that the executed trust deed did not materially differ from the annexure. The provision of the annexure significant in this regard is clause 6:
“6.1Subject to the following provisions of this Clause 6 the Trust Fund and the Trust shall terminate and vest absolutely on the date which is two (2) years from the date of issue of the Final Certificate under the Contract (“the Vesting Date”). The Principal may at any time in its absolute discretion appoint a date earlier than the Vesting Date to be the date for vesting of the Trust Fund for the purposes of this Deed.
6.2Upon the vesting of the Trust Fund the Manager shall disburse the Trust Fund to the Beneficiaries or (subject to Clause 3 hereof) itself (as the case may be) and thereafter shall provide the Principal with:-
(a)financial statements from the bank at which the Trust Account is established; and
(b)receipts from the Beneficiaries of the amounts paid to them, each in a form satisfactory to the Principal and establishing that all payments in and out of the Trust Fund have been made in accordance with this Deed.”
In response to a query raised during the hearing of the appeal, I record that I see no sufficient reason to construe cl 6.1 as limiting any appointment of an earlier vesting date to a time after the issue of the final certificate. I read the provision as authorising the State, “in its absolute discretion”, to appoint any subsequent date for the vesting of the Trust Fund. The present significance of the clause is its confirmation that the trust might at any stage be brought to an end.
A residual question is whether that provision should nevertheless be read, however, as qualifying the exercise of any power of amendment or variation otherwise confirmed by cl 21.6. Again, I would see no sufficient justification for such a view.
Her Honour apparently considered this provision devoid of relevance in determining the issue, simply because the power to appoint an early date was not exercised. That aside, the provision was in my view nevertheless significant as bearing on what should objectively be discerned as to the parties’ intent concerning, generally speaking, the subsistence of the trust in its current form.
The learned judge was apparently substantially influenced to her conclusion that the terms of the trust could not be varied as did occur, by an appreciation of the substantial potential benefit to the beneficiaries from its continuation. Obviously, were Leighton to experience financial difficulties leading, perhaps, to receivership or liquidation, the beneficiaries would be substantially protected by the existence of such a trust.
Also, as Her Honour found, Stork was aware, when entering into its subcontract with Leighton, of the arrangement between Leighton and the State for the State’s payment into the trust account, and the provision for a trust deed. The judge referred to the minutes of a meeting on 18 September 1993 between representatives of Stork and Leighton, before the execution of the subcontract, which record administrative arrangements for the processing of progress claims. Those minutes include specific reference to payment by the State into the trust account. Her Honour referred also to a provision which may have given the record contained in those minutes contractual force; and as well, to clause 39 of the conditions of tender, which included reference to the trust deed, and the formal subcontract which also contained such reference. (As she pointed out, Stork’s case was not conducted on the basis of any estoppel.)
Those circumstances, while obviously relevant, did not however of themselves warrant the conclusion that the arrangement could not thereafter be varied by Leighton and the State regardless of the consent of the subcontractors or other beneficiaries. Of course those beneficiaries were entitled to the due administration of the trust while it subsisted. But I am not persuaded that subsequent commercial considerations, for example, could not have justified the State’s and Leighton’s exercising a power of amendment to vary the terms of the trust as they may have considered appropriate.
Mr Jackson QC, who led for the appellants, emphasised the importance, in determining the parties’ intention, of identifying the scope of the trust with precision by reference to its terms and in this case contractual basis. He referred in that regard to Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107,140; Loch v Westpac Banking Corporation & Ors (1991) 25 NSWLR 593, 606-7; and Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363,366, 368, 370.
The submission is undoubtedly correct. The provisions to which I have referred – the express confirmation of a power of variation, the provision as to the appointment of an early termination (vesting) date, and the State’s disavowal of an obligation to Stork expressed in the tripartite agreement, constitute a contractual matrix which would be consistent with the legitimacy of the variation in fact effected.
For her view that this particular variation was beyond power, the learned judge relied, additionally to Warman mentioned earlier, on Phipps v Boardman [1967] 2 AC 46, 105 and Consul Developments Pty Ltd v DPC Estates Ltd (1975) 132 CLR 373, 393. Neither of those additional authorities warrants the conclusion that the terms of this trust were not susceptible of variation by the State and Leighton. More helpful, as the judge acknowledged, is Elders Trustee and Executor Company Ltd v Symon [1934] SASR 435, 439, which confirms that “whether or not it is revocable (or, I would add, susceptible of variation) is a question of intention”.
Apart from the particular provisions of the Managing Contractor Contract and the trust deed to which I have referred, and approaching the matter perhaps a little more broadly, I accept the submission for the appellants that “it is likely the State … and (Leighton) … wished to preserve flexibility in their commercial dealings in approaching a long and complex contractual relationship and that they “intended to keep alive their rights to vary the terms of their obligations (Winterton, supra, pages 370-1)”. The prohibition in the Managing Contractor Contract upon assignment by Leighton of its interest under that contract (cl 21.3) is also consistent with that. That prohibition suggests that the State was concerned not to be put into a position where, without its approval, rights against the State could be vested in an entity other than Leighton. The State intended to retain that measure of control and flexibility.
It is necessary for me to mention now an aspect which attracted submissions on appeal. The form of the first question submission for preliminary determination concerned whether the “Deed of Variation (No 2)” and its implementation gave rise to a breach of the trust created by either (i) the trust deed, or (ii) clause 16.2(c) of the Managing Contractor Contract. In answering “yes” respectively to question 1(a)(i) and (ii) and question 1(b)(i) and (ii), Her Honour should probably be taken, notwithstanding the separation of (i) and (ii) by the conjunction “or”, to have accepted the assumption implicit in the question that there were two trusts: the express trust created by the trust deed, and an implied trust arising from clause 16.2(c) of the Managing Contractor Contract. She described the subject matter of the implied trust as the promises, for the potential benefit of subcontractors, involved in cl 16.2 and 16.4 – that is, especially, the State’s promise to pay into the trust bank account, which promises Leighton held on trust for the beneficiaries.
There is in my view no need to dwell on these aspects. The trust deed was in truth the implementation of the covenants in the Managing Contractor Contract. It suffices for present purposes to acknowledge that both these implied and express trusts were subject to the power of variation exercised by the State and Leighton.
The Managing Contractor Contract was susceptible of variation by agreement, on ordinary contractual principles, and as pointed out, that is implicitly acknowledged through the terms of cl 21.6. That power of variation extended, for reasons expressed above, to the terms of the trust implicitly arising from cl 16.2 and cl 16.4. Once one identifies the Managing Contractor Contract as the source of the express trust, the terms of that trust mirroring those proposed by the annexure to the contract, and acknowledging the other circumstances referred to above – the contractual provisions and the significance of commercial considerations in particular, the conclusion follows that Leighton and the State, the parties to the trust deed, intended the power of variation to extend to its terms such as to authorise what in fact occurred.
In my view, the answer to question 1(a)(i) and (ii), and question 1(b)(i) and (ii) should in each case have been “no”. That being so, it is unnecessary to answer question 2.
I would allow the appeal and set aside the orders made on 15 March 2000, including as to costs. I would answer the questions posed for preliminary determination as follows:
Question 1(a)(i)(ii): “No.”
Question 1(b)(i)(ii): “No.”
Question 2: “Unnecessary to answer.”
I would order the respondent to pay the appellants’ costs, of the appeal and of the hearing at first instance, to be assessed.
THOMAS JA: This appeal arises in the course of litigation between parties who were involved in the construction of the Brisbane Convention and Exhibition Centre project. There are three relevant entities, only two of whom are parties to the present litigation. The State of Queensland ("the principal") commissioned and paid for the project. It engaged a managing contractor ("Leighton"). Leighton engaged various subcontractors and consultants, including a subcontractor for electrical work ("Stork"). The present issues arise in the course of an action brought by Stork against Leighton and one of its senior officers.
Issues
Stork's statement of claim raises a primary claim for about $2.3 million for monies due under the subcontract. Substantial components of this consist of claims for variations and "delay" claims. There are further and alternative claims for misleading and deceptive conduct under s 52 of the Trade Practices Act based inter alia on alleged representations that the development had been fully designed. There is then a further alternative claim (in pars 53 to 70) alleging breach of a trust said to arise on Leighton's part in favour of Stork and other subcontractors and consultants. Essentially it is said that in consequence of the dealings between the principal and Leighton a trust arose in favour of third parties (including Stork) and that Leighton is accountable to Stork for breach of that trust. It is alleged that by reason of Leighton entering into varied arrangements with the principal, and in particular by entering into "Deed of Variation No 2" on 22 December 1994 Leighton breached the trust and thereby obtained a benefit of about $40 million in respect of which it is bound to account to the beneficiaries including Stork.
On Stork's application, Muir J ordered the preliminary determination of a series of questions designed to determine whether such a trust arose in favour of Stork and whether Leighton's entering into the Deed of Variation No 2, and giving effect to it, amounted to a breach of trust. Those specified issues were then determined in the Trial Division favourably to Stork. The present appeal is Leighton's appeal against that determination.
Facts
There is no controversy concerning the facts on which the present issues are to be determined. The primary materials are in the form of contracts and other documentary materials. The relevant factual background may conveniently be summarised as follows.
Leighton's tender for the project was accepted by the principal on 26 February 1993. The acceptance was in terms of the tender and other documentary material which was, much later (23 May 1994), formalised in a document called the "Managing Contractor Contract". By that time performance of the contract (with substantial variation of design and works) was well advanced. It is common ground however that there is no material difference between the contract that was in force between those parties from 26 February 1993 and that which was formally signed on 23 May 1994.
Pursuant to that contract Leighton was appointed the managing contractor for the design, construction and commissioning of the centre. It was a lump sum contract which provided for payment by the principal to Leighton of a guaranteed maximum price (GMP) of a little over $138 million. The GMP included all sums payable by Leighton to subcontractors and consultants, together with a management fee which included all of Leighton's off-site overheads and profit which was to be retained by Leighton.
The subcontract between Leighton and Stork (dated 1 March 1994) required Stork to supply, install, test and commission the electrical services for the centre. Stork carried out this work as varied from time to time as directed by Leighton.
The Managing Contractor Contract (or its earlier equivalent) contained special provisions to secure monies payable to subcontractors. These provided for the setting up of a trust account established in the first instance by the principal in accordance with the terms of a trust deed which the contract required to be set up.
Documents
There are five essential documents to which reference must be made in determining this matter. They are –
(a) Managing Contractor Contract(This will also be referred to as the "head contract")
The equivalent of this bound the principal and Leighton from 26 February 1993, but the formal document was not made until 23 May 1994. Relevant parts of this contract are set out in pars [52] and [53] below. It was commonly referred to in submissions as "the head contract".
(b) Trust Deed (19 April 1993)
This was set up in accordance with a term described as "fundamental" in the Managing Contractor Contract. Its purpose was to make possible the carrying out of the system between the principal and Leighton. Under this system, when monies were payable by the principal to Leighton, the principal would determine how much of that sum was payable in respect of the work of subcontractors and consultants, and would pay that sum into a trust account for the benefit of those parties. The principal would then pay the balance to Leighton. The necessary trust account was set up by the principal a few days later, with a deposit of $10 followed in due course by substantial payments for the benefit of subcontractors and consultants. Relevant parts of the Trust Deed are set out in par [54] below.
(c) Stork's subcontract (1 March 1994)
Stork's tender was accepted on 1 November 1993 and progress payments were paid to Stork from as early as 19 January 1994. It seems that once again a later contract was made to formalise an understanding under which work had already commenced. Relevant parts of the subcontract are set out in pars [55] and [56] below.
(d) Sub-Contractor Deed of Covenant (7 March 1994)
This was the only relevant document to which all three entities, namely the principal, Leighton and Stork were privy. Relevant parts of this deed are set out in par [57] below.
(e) Deed of Variation No 2 (22 December 1994)
This varied the Managing Contractor Contract. (The first Deed of Variation between those parties is not material.) Under Deed of Variation No 2, Leighton was granted a new GMP of $178 million, that is to say by some additional $40 million. It also varied a number of administrative arrangements including the removal of the provisions under which the principal would earmark and pay into the trust account monies for the subcontractors and consultants. Relevant parts of this document are set out in par [58] below.
By the time Deed of Variation No 2 was made extensive changes had occurred in the circumstances that existed at the time of making the original contract. A "design development" period had led to substantial changes being made to design and therefore to the scope of the works. When the subcontracts were let, they were all for a greater scope of work than that set out in the original tender. The new arrangement for an increased GMP was the end result of commercial negotiation between the principal and Leighton.
Pursuant to this variation clauses 16.1, 16.2 and 16.4 of the Managing Contractor Contract were deleted. These were the key provisions setting up the scheme whereunder the principal would, in effect, earmark monies payable in respect of the work of subcontractors and consultants, and pay it into the trust account. That system provided protection to those parties against the consequences of any insolvency or inability to pay on the part of Leighton. Under the terms of the new cl 16.4, the principal was absolved from such responsibility and Leighton undertook responsibility for all payments to subcontractors and consultants. The result was that subcontractors lost the security of having the State Government directly pay their prospective entitlements into the trust account, and the protection that came with such funds being administered in accordance with the Trust Deed. The subcontractors lost the potential benefit of having a third party determine and then sever their entitlements from those of Leighton.
The release of the principal from that obligation deprived the trust of practical utility. The subcontractors no longer had the equitable entitlement to monies payable to them, and in respect of future payments became unsecured creditors of Leighton. Deed of Variation No 2 was entered into without the knowledge or consent of Stork or other subcontractors. By contrast, Stork had been acquainted with the nature of the protective trust account scheme before entering into its subcontract with Leighton. However no claim in the nature of an estoppel has been made on Stork's behalf.
The determination of whether a trust arose in Stork's favour and if so on what terms involves the construction of select parts of very lengthy documents. I do not propose to set out extensive extracts in these reasons and will as far as possible state my conclusions with minimal quotation of relevant provisions. I shall so far as possible avoid repeating the provisions that are set out in the reasons of the other members of the court.
The essential provisions for the purposes of discussion are as follow.
The Managing Contractor Contract
Clause 16.2 of the conditions provided inter alia for progress payments to be made to Leighton as follows:
"The payment of moneys due under a progress certificate shall be made by the Principal within twenty-one (21) days after the issue of that progress certificate as follows:
(c)the Principal shall pay the amounts payable to the Consultants and the Sub-Contractors into the bank account set up by the Manager pursuant to the Trust Deed; and
(d)the Principal shall pay the Manager the balance of the amount specified by that progress certificate."
Clause 16.4 dealt further with the proposed Trust Deed, a draft copy of which was annexured to the contract. It provided as follows:
"Trust Deed
The Manager shall execute the Trust Deed and shall thereafter deliver an executed copy thereof to the Principal's Representative within seven (7) days of the date of acceptance of tender. The execution of the Trust Deed by the Manager within this time period is a fundamental obligation of the Manager under this Contract. If the Manager fails to comply with this obligation this shall be deemed to constitute a fundamental breach going to the root of the Contract. All amounts which are payable by the Manager to the Consultants and the Sub-Contractors are to be paid by the Principal into the bank account which is set up by the Manager pursuant to the Trust Deed and shall be held by the Manager on trust for the Consultants and the Sub-Contractors in accordance with the terms of the Trust Deed."
The Trust Deed
The core provisions of this deed include:
"RECITALS: …
B.Pursuant to subclause 16.2 of the Contract the amounts payable to the Manager under the Contract shall include monies payable to the consultants and sub-contractors engaged by the Manager pursuant to the Contract ("the Beneficiaries").
C.Pursuant to subclause 16.2 of the Contract the Principal and the Manager have agreed that all monies payable to the Manager on account of the Beneficiaries shall be held on trust on the terms of this Deed.
OPERATIVE: …
2. Trust Property
2.1The Principal shall open the account referred in Clause 1 with a deposit of Ten Dollars ($10.00) which, together with any future payments into the account shall be held by the Manager as trustee on trust for the benefit of the Beneficiaries …
2.2The Principal shall pay all money which is payable under subparagraph (c) of subclause 16.2 of the Contract into the Trust Account to be held on the above trust.
2.3Each of the Beneficiaries shall have a beneficial entitlement to ensure that this Deed is administered in accordance with its terms, but none of the Beneficiaries shall be entitled to a specific portion of the Trust Fund, save in accordance with clause 6 hereof.
…
6.Vesting
6.1Subject to the following provisions of this clause 6 the Trust Fund and the Trust shall terminate and vest absolutely on the date which is two (2) years from the date of issue of the Final Certificate under the Contract ("the Vesting Date"). The Principal may at any time in its absolute discretion appoint a date earlier than the Vesting Date to be the date for vesting of the Trust Fund for the purposes of this Deed."
The Subcontract
Clause 7 of this agreement provided:
"The Manager will so far as he lawfully can upon the written request and at the cost of the Sub-Contractor obtain for the Sub-Contractor any rights or benefits of the Managing Contractor Contract so far as the same are applicable to the work under the Contract but not further or otherwise and shall when requested in writing by the Sub-Contractor so to do in like manner inform the Sub-Contractor of any action taken by him in this regard."
Clause 39 dealt with the submission of progress claims by the subcontractor and for the issue of progress certificates by Leighton. Clause 39(b) provided:
"The Manager shall pay the Sub-Contractor within fourteen (14) days after the Principal has paid the moneys in respect of the relevant progress claim into the bank account established under the Trust Deed provided that if:
(i)the Principal fails to pay money into this bank account as a result of a default by the Manager under the Managing Contractor Contract, or
(ii) the Sub-Contractor's progress claim includes a claim for money which will not be payable by the Principal to the Manager under the provisions of the Managing Contractor Contract,
the Manager shall pay the Sub-Contractor within 42 days of receipt by the Manager of the Sub-Contractor's progress claim …"
Sub-Contractor Deed of Covenant
Clause 3 provides:
"Notwithstanding any provision of the Contract or the Sub-Contract each of the Manager and the Sub-Contractor acknowledges and agrees for the benefit of the Principal that:
(a) they will duly and punctually perform their respective obligations under the Contract and the Sub-Contract; …
(f)the Principal owes no obligation to the Sub-Contractor unless it otherwise agrees in accordance with this Deed."
Deed of Variation No 2
This deed increased the lump sum price to approximately $178 million. Other variations to the original Managing Contractor Contract included the deletion of cl 16.1 and 16.2. The following was inserted in place of cl 16.4:
"The Manager shall be responsible for all payments to Sub-Contractors and Consultants. Such payment may be made by the Manager through the Trust Account set up pursuant to the Trust Deed and the Manager acknowledges that the Principal shall have no responsibility to make any further payments to the Trust Account for this purpose."
An error by the learned trial judge
One of the grounds of appeal is that her Honour erred in finding that under cl 3(a) of the Sub-Contractor Deed of Covenant both Leighton and the principal covenanted with Stork that they would perform their respective obligations under the head contract and subcontract. This was an error on the part of the learned judge. Plainly those covenants were given by Leighton and Stork only. It is difficult to think however that this was a decisive factor in her Honour's conclusions. However, an error has been revealed, and it is impossible to tell how influential it was in the overall decision. As the determination depends essentially upon written material and uncontested facts I propose to reconsider the matter and reach my own conclusions.
One trust or two?
The learned trial judge determined that in entering into and giving effect to Deed of Variation No 2 Leighton acted in breach of the trusts created by the Trust Deed and by cl 16.2(c) of the Managing Contractor Contract. The declaration included the statement that the trusts were in favour of persons and entities including the plaintiff.
Her Honour also accepted Stork's submission that Leighton held the benefit of the principal's promise (pursuant to cl 16.2 and 16.4 of the Managing Contractor Contract) to pay into the trust account monies payable to the subcontractors and consultants, as trustee for the subcontractors and consultants. In short, her Honour identified a primary trust in this respect. The answers supplied by her Honour recognise two discrete trusts namely:
(a) An implied trust created on 26 February 1993 when the head contract was entered into; and
(b) An express trust the terms of which were set out in the Trust Deed executed on 19 April 1993.
The submissions on behalf of Leighton suggest that her Honour's reasons treat the deed of trust as having formalised the implied trust, and that this is inconsistent with the order. However it seems to me that her Honour clearly recognised the distinction and differing effect of the two trusts. The execution of the Trust Deed might properly be regarded as a performance of one of the duties under the original trust, and I do not regard her Honour as having suggested that that trust was fully discharged by the creation of the formal Trust Deed. The trust property under the original trust was identified as a chose in action, namely Leighton's right to enforce the principal's promise to pay in the manner stated in the contract.
The essential thrust of the submissions for Leighton on appeal is that the only trust that arose in favour of Stork was that under the Trust Deed of 19 April 1993; that it was revocable; and that it was lawfully terminated pursuant to Deed of Variation No 2.
Intention to constitute a trust:if so, what trust or trusts?
It was not suggested that a court of equity may not imply a trust in respect of a contractual promise. The submission for Leighton is that the intention to constitute such a trust must be affirmatively proved, and that such an intention is not necessarily to be inferred from mere general words.[1] In this matter while there was no express reference to a trust of the principal's promise in cl 16 there was an express requirement that a trust deed be entered into in specified terms.
[1]Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 115.
It was submitted for Leighton that it should be concluded that no other trust arose other than that constituted by the express trust under the Trust Deed. In support of that conclusion it was urged that it was likely that the principal and Leighton would have wished to preserve flexibility in their commercial dealings over a long and complex contract. It was submitted that the same conclusion as that in Winterton Constructions Pty Ltd v Hambros Australia Ltd[2] should be reached, namely that the original contracting parties "intended to keep alive their rights to vary the terms of their obligations" without breaching the trust duties that therefore existed in favour of third parties. Supporting arguments included reference to a contractual restraint on Leighton assigning its interest under the head contract, which was said to evince the principal's intention not to vest rights in a party other than Leighton. Further reliance was placed upon cl 3(f) of the Sub-Contractor Deed of Covenant in which Stork agreed that the principal owed no obligation to it unless it otherwise agreed. It follows, according to the submission, that the principal could exercise its powers to vary the head contract or to terminate the express trust without regard to any rights of Stork.
[2](1991) 101 ALR 363 per Gummow J at 370-371.
The principal could vary the head contract only if Leighton allowed it to do so. It was conceded by Leighton that it became a trustee, but the concession was only in terms of the Trust Deed, and Leighton further contended that it had no obligation to keep that trust on foot for the duration of the contract. On Leighton's submission it is unlikely that the parties intended that the principal's power under cl 3(f) of the Sub-Contractor Deed of Covenant would be subject to veto by the subcontractor under an implied trust such as that found by her Honour. For my part I find little assistance in the Sub-Contractor Deed of Covenant, or in the concession which the parties to that deed wrought from Stork in favour of the principal well after the making of the Managing Contractor Contract. In considering the intention of the parties who created the original trust, the intention is to be gauged at the time of its creation, although of course subsequent conduct by those parties might cast some light on the original intention. I do not think that the Sub-Contractor Deed of Covenant casts much light in this respect.
The principles are not in doubt. The following statements indicate fairly broadly the approach to be taken.
"In divining intention from the language which the parties have employed the courts may look to the nature of the transaction and the circumstances, including commercial necessity, in order to infer or impute intention."[3]
"Equity's requirement of an intention to create a trust will be at least prima facie satisfied if the terms of the contract expressly or impliedly manifest that intention as the joint intention of both promisor and promisee."[4]
[3]Trident above per Mason CJ and Wilson J at 121.
[4]Ibid per Dean J at 146-147.
In my view her Honour correctly discerned an intention when the original contract was made on the part of both the principal and Leighton to set up an arrangement binding themselves to a method of payment which would provide a specific benefit for subcontractors and consultants. Such a method was put in place, and its application was promised to subcontractors such as Stork. It is a feature which would reasonably be regarded as one that should apply for the duration of the contract. However I leave for later discussion the question whether the trust which arose in favour of the third parties was intended to be revocable by the principal and Leighton.
I consider that there was sufficient evidence of an intention to create a trust in respect of the contractual provisions in cl 16, and in particular of Leighton's right to enforce those provisions, when the contract was entered into on 26 February 1993. For the purposes of the present point I think it clear that by entering into the original contract Leighton became a trustee in favour of Stork and other subcontractors and consultants in circumstances entitling Stork to compel Leighton to have the principal's obligations thereunder carried into effect for the benefit of Stork.[5] There was therefore a primary implied trust arising essentially from the terms of cl 16.2 and 16.4 of the Managing Contractor Contract. The subsequent making of the Trust Deed was at least a partial performance of Leighton's duties under that primary trust.
[5]Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107, 115; compare Winterton Constructions Pty Ltd v Hambros Australia Ltd (1991) 101 ALR 363, 368.
The more difficult questions are "What were the terms of the primary trust?”,and
"Did those terms preclude the trustee from terminating the prescribed system of payment for the duration of the contract?".
Duration of the trust
It was submitted for Leighton that her Honour should have found that there was an implied power of revocation of the trust of the promise in cl 16.2 of the head contract. It was said that Leighton reserved the right to agree with the principal to vary or abrogate the promise.[6]
[6]cf Trident (above) at 140; Winterton Constructions Pty Ltd v Hambros Australia Ltd (above) at 366.
Particular reliance was placed by Leighton upon clause 6.1 of the Trust Deed which provided that the principal had an absolute discretion to appoint an early "vesting date". The term "vest" appears to have been misunderstood by those responsible for drafting this document. It is difficult to tell what meaning was intended, but it probably contemplates the termination of the trust upon payment to the subcontractors and consultants of their entitlements from the fund. In the context of a building contract as substantial as this one it is unremarkable that a termination date for final administration of such a trust should be fixed two years after the issue of the final certificate under the contract. Neither is it surprising that there should be a further provision enabling the principal to appoint an earlier date, as for example if all entitlements were clearly ascertained at an earlier time. It would however be surprising if the principal were given power to appoint a "vesting date" prior to the issue of the final certificate. The existence of such a power would be capable of rendering nugatory the entire trust arrangement and defeating the purpose of the parties in creating such a system. It is true as Mr Jackson QC pointed out on Leighton's behalf, that there is no express limitation in this clause upon the principal's power to appoint an earlier date. The language of cl 6.1 is not the language of a power of revocation of the trust, which would be the effect if the clause were construed in this way. In my view the proper construction of this clause consistently with the other provisions affirming the trust and the beneficiaries' "entitlement to ensure that this deed is administered in accordance with its terms"[7] is that the principal's power of appointing an earlier date is limited to the two year period commencing on the date of issue of the final certificate. I appreciate that this is not a literal reading of cl 6.1. The literal reading contended for by Leighton would negate the system provided for in the Managing Contractor Contract to which the Trust Deed was initially an annexed draft, and is capable of rendering the Trust Deed illusory. I would construe the principal's right to terminate under cl 6.1 as being limited to the two year period commencing with the issue of final certificate.
[7]Clause 2.3.
My conclusion in the preceding paragraph is not essential to the upholding of the two trusts on Leighton's part. The power mentioned in cl 6.1 of the Trust Deed is a power given to the principal, not to Leighton against whom the proceedings are brought. Further, the principal at no time exercised or purported to exercise that power. It is said on Leighton's behalf that the literal construction of cl 6.1 of the Trust Deed is inconsistent with an intention that the trust payment regime of cl 16 should last the life of the contract. However, even if the principal has the power to terminate the trust prematurely, it does not follow that Leighton's duty under the trust is diminished.
The answer as to whether such a trust is revocable or not is of course a question of intention.[8] Some cases[9] recognise the express assent of the beneficiary as the only defence to a breach by a person in a fiduciary position who makes a profit from placing himself in a situation where his duty and interest conflict. In the present case however the determination of the issue which was compendiously put by counsel as the revocability of the trust depends upon the construction of the documents.
[8]Elder’s Trustee and Executor Co Ltd v Symon [1934] SASR 435, 439.
[9]Phipps v Boardman [1967] 2 AC 46, 105; Consul Developments Pty Ltd v DPC Estates Ltd (1975) 132 CLR 373, 393; Warman International Ltd v Dwyer (1995) 182 CLR 544, 563.
In the subcontract the parties saw fit to include the minutes of a meeting on 18 September 1993 between Stork and Leighton which recorded the proposed arrangements for the processing of progress claims. Those parties saw fit to give those minutes contractual force. Special Condition No 1 of the subcontract gave "No 1" precedence to those minutes in the resolution of differences between the parties, ahead of the special conditions themselves which were given "No 2" in the order of precedence. There is no suggestion in the minutes that the payment system could be revoked or altered without the consent of Stork. Indeed the overwhelming inference is that this was the system which was to prevail for the administration of the contract. Although this part of the contract does not spell out the specific promises, it affords a clear indication of the intention of Leighton and Stork and of the importance that they attached to the system of payment provided for in the head contract.
In the head contract there is no express reservation in favour of either the principal or Leighton to withdraw the system of payment provided for by cl 16. That clause prima facie confers rights on third parties of a kind which the third parties may enforce. I do not construe the provisions in the head contract which recognise the prospect of variations and which prescribe the means by which they may be made as subordinating these rights of third parties to the right of the contracting parties to rescind or modify the contract.[10] It is hardly unusual to see such provisions in a head contract for the construction of major works, or for that matter in any building contract. It was noted in Trident that "in Queensland the parties lose their right to rescind and modify the contract without the third party's consent on the third party's acceptance of it".[11] It seems to me that in entering into the subcontract Stork accepted the benefit of the cl 16 promises. However the application of s 55 of the Property Law Act was not made the subject of specific argument, and I do not rest my conclusion on this point. I am in any event satisfied that Leighton's duty as trustee was to take reasonable steps to protect the payment regime for the benefit of the subcontractors for the duration of the contract. On this footing it would be a breach of trust on Leighton's part to induce the principal to exercise such a power or to enter into an agreement with the principal which destroyed the trust payment regime.
[10]cf language of Mason CJ and Wilson J in Trident (above) at p 122.
[11]Ibid p 122 per Mason CJ and Wilson J, citing sections 55(2) and 55(3)(d) of the Property Law Act 1974.
This conclusion is reinforced by the "Contract Manual" which is an acknowledged part of the head contract. It speaks at some length about the Trust Deed. It contains the statement that "the manager is trustee of the trust account and remains trustee unless the Managing Contractor Contract is terminated or the manager is wound up or placed in receivership". It continues "it holds this money as trustee for the consultants and the subcontractors. Accordingly if the manager is placed in liquidation the money in the trust account is not available to the manager's liquidators for distribution to its creditors".[12]
[12]Head contract schedule 1, appendix R, "Contract Manual" cl 4.6.
The function of cl 16.4 was to set up the prescribed system for the payment of subcontractors and consultants. This included the setting up of a trust deed. Both the principal and Leighton had the right to insist that the other should continue to operate that system. Whether Leighton's action in entering into Deed of Variation No 2 is seen as a failure to protect the trust property, or as a failure to enforce a promise that it was under a duty to enforce, or as a direct act leading to destruction of the trust property, it seems inevitable that such an action was a breach of the trust.[13] It was Leighton's duty as trustee to take reasonable steps to preserve the benefit of the promises in cl 16 for the relevant third parties during the life of the head contract. It should be noted however that the terms of the reference are quite limited and that the limited finding that has been made of breach of trust does not necessarily transpose into an entitlement to damages, compensation or account. It has not been found that through Leighton's breach Leighton thereby obtained any particular monetary benefit or that Stork thereby suffered any loss. Counsel requested that the court should go no further than the strict limits of the questions posed, and that it should not pre-empt any further issues that might be raised by way of defence to the grant of relief (if any) that may be appropriate in respect of the breach of trust.
[13]Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149, 165; Re Brogden (1888) 38 Ch D 546; Fenwick v Greenwell (1847) 10 Beav 412; 50 ER 640.
Some further grounds of appeal
It was contended on Leighton's behalf that her Honour erred in failing to find that Leighton's contractual right to vary the head contract existed before any obligations as trustee arose. This was said to be contrary to the principles enunciated in Hordern v Hordern[14]. I agree however with the conclusion of the learned trial judge that this was not a case where contractual rights preceded fiduciary duties, but one where contractual and trust relationships co-existed. I agree with her Honour's statement:
"The fiduciary relationship between Leighton and Stork did not post-date the entry into a contract between them, and the settlor of the trust, the State of Queensland, did not impose on Leighton a fiduciary duty inconsistent with any pre-existing contractual interest as the execution of the Trust Deed was a fundamental obligation of the contract between Leighton and the State of Queensland."
[14][1910] AC 465.
There is a further ground of appeal that her Honour erred in failing to find that cl 16 of the head contract could be varied by agreement at any time provided the variation was in writing as required by cl 21.6 of that contract. This raises a false issue. I do not doubt that the parties inter se could vary their contract by mutual consent as and when they chose, subject of course to any specific provisions about the variation. The true questions in my view are whether the power of variation overrode the trust, and whether Deed of Variation No 2 could be made without breach of the trust to which Leighton had become subject. I have earlier answered these questions adversely to Leighton.
Ambit of trust
Finally it was contended that her Honour erred in failing to find that under the head contract and Trust Deed the only monies which the principal was obliged to pay into the trust account were monies payable to consultants and subcontractors which had been the subject of a progress certificate issued by Leighton. It was submitted that the requirement in cl 16.4 that "all amounts which are payable by the manager to the Consultants and the Sub-Contractors" should be confined to the monies due under a progress certificate referred to cl 16.2. Both clauses 16.2(c) and 16.4 require Leighton to pay monies into the trust account that was to be set up. Clause 16.2(c) requires payment of monies due under a progress certificate whereas cl 16.4 requires payment of "all amounts which are payable by the manager to … the Sub-Contractors". Prima facie the latter is a wider duty. This potentially broader operation is affirmed by Recital C in the Trust Deed ("all monies payable to the manager on account of the beneficiaries …") and by cl 2.1 of the Trust Deed ("any future payments into the account …").
The nature of any payments other than progress payments that could be paid into the trust account by the principal is not immediately obvious. Mr Morrison QC for Stork submitted that both the head contract and the subcontract contained provisions for the calculation of entitlements arising by reason of delay, and that such payments would be covered by cl 16.4. I find it very difficult to conceive any situation in which the operation of the respective "Damages for Delay" clauses (cl 14.8 of the head contract and cl 49 of the subcontract) could result in a payment being made by the principal into the relevant trust account. In Stork's case the difficulty is enhanced by the fact that no amount has been inserted in the appropriate schedule under the heading "Agreed Damages for Delay".
Mr Morrison QC further submitted that retention monies were contemplated as monies that ought to be paid into the trust account. I have some difficulty with the notion that retention monies could be separately contemplated in this context, as on my reading of the documents such monies are merely a portion of a certified progress claim which would otherwise be paid in full. However despite my difficulty in comprehending how retention monies or damages for delay could in the first instance be subject to the trust account regime, it would seem that the final certificate entitlement of the subcontractor under cl 40 of the subcontract (which to some extent mirrors Leighton's final certificate entitlement against the principal) is an amount payable to the subcontractor which could be made subject to the trust account regime. This aspect was not fully argued and I do not purport to express a final view upon it. It suffices for present purposes to say that there is good reason to think that there is room for practical operation of the promise in cl 16.4 beyond the coverage of progress payments in cl 16.2(c). Its operation however must be confined to money payable by Leighton to Stork under the subcontract, and it cannot include money which is not payable by the principal to Leighton.
I therefore conclude that it is not shown that her Honour erred in failing to find that the only monies which the principal was obliged to pay into the trust account were those which had been the subject of a progress certificate issued by Leighton.
Form of order
The learned trial judge was in my view correct in the answers which she gave to questions 1(a)(i), 1(a)(ii), 1(b)(i) and 1(b)(ii). Her Honour however did not see fit to answer the further questions raised in paragraph 2 of the referral, observing that the additional questions were poorly expressed and that the matters raised by them were sufficiently covered by the answers to the first question. Leighton's notice of appeal contains a schedule of orders which were submitted to be appropriate if her Honour's reasoning were to be upheld. That schedule however needs substantial amendment as it erroneously interprets the "trust referred to in par 5 of the further amended statement of claim" as referring to the primary trust, whereas that paragraph is concerned with the Trust Deed. Further adjustment to the draft schedule would also be required to ensure that the benefit of the promises in both cl 16.2(c) and 16.4 of the Managing Contractor Contract are recognised. These difficulties were not addressed in argument, and before any variation of the present order could be made further submissions would be necessary. As my view on the fate of the appeal is in the minority further submissions at this stage on the form of order would be pointless.
In the result, although in substance I would dismiss the appeal, I would adjourn it for the purpose of receiving further submissions as to answers that should be given to question No 2, and would order the appellant to pay the respondent's costs of the appeal
WILLIAMS J: The issues to be determined on this appeal, and the facts relevant to that determination, are substantially set out in the reasons for judgment of the Chief Justice, which I have had the advantage of reading. I agree with the conclusion he has reached and with his reasoning. However, I wish to articulate my own reasons for resolving the issues raised in that way.
The task which Leighton undertook was the management of an extremely large construction project for the State of Queensland (“the Principal”). As is often the case with such projects no design existed as at the date of tender. The work to be undertaken by the successful manager was to design and construct the project. Leighton’s tender (submitted 19 January 1993 and modified 4 February 1993) had annexed to it certain documents which had been prepared by the Principal and were to be incorporated into all tenders submitted. Those annexures included a document entitled “Tender and Agreement Conditions” and a draft “Trust Deed” which were to be incorporated into any contract based on acceptance of the tender. By letter dated 26 February 1993 the Principal accepted Leighton’s tender “with a Guaranteed Contract Sum of $138,408,178”. That acceptance also stated that “the maximum time for design development, documentation and construction of the works is 96 calendar weeks from the date hereof.”
Clause 2.1 of the “Agreement Conditions” provided that the Principal would pay the Manager (Leighton) the lesser of the actual cost of design, construction and management and the Guaranteed Maximum Price of $138,408,178.
The formal Deed of Agreement between the Principal and Leighton was not executed until 23 May 1994. It also incorporated the documents annexed to the tender. By then much of the contract work had been performed, but the Guaranteed Maximum Price was still that specified in the tender and letter of acceptance. That was so, notwithstanding that the scope of the work the subject of the contract had by then increased. As the learned trial judge found: “After the letter of award, a design development period led to a number of changes being made to the design and therefore the scope of the works. When the sub-contracts were let, they were all for a greater scope of work than set out in the original tender and letter of award.” It was no doubt because of that that under cover of a letter dated 6 May 1994 (about two weeks prior to the formal execution of the Deed) Leighton submitted to the Principal an “Estimate of Final Project Cost” in the sum of $172,402,063. In the light of that it is not surprising to find in the Deed of Agreement of 23 May 1994 frequent reference to possible variations. The Chief Justice has quoted cl 21.6 of the Agreement Conditions which also expressly dealt with variations.
There is no doubt that it was clearly within the contemplation of the parties to the agreement evidenced by the acceptance of the tender and later by the formal execution of the Deed of Agreement that the terms and conditions as between the Principal and the Manager could be varied by agreement to accommodate matters arising during the course of the project. All of the documents relevant to the contract between the Principal and the Manager were available to Stork prior to the acceptance of its tender on 1 November 1993 and the execution of the formal sub-contract agreement on 1 March 1994. Indeed it is essential to its case that it entered into the sub-contract agreement knowing of the provisions of the Trust Deed and the requirements of cl 16 of the Agreement Conditions.
The Trust Deed had in fact been executed by the Principal and Manager on 19 April 1993 and the relevant bank account was opened on 21 April 1993.
The answers to the questions posed by the order of 28 April 1999 depend largely, if not entirely, in my view, on the proper construction of cl 16 of the Agreement Conditions. The relevant provisions, cl 16.1, 16.2, and 16.4 are set out in the reasons of the Chief Justice. The Trust Deed had been in use for many months prior to the formal agreement between the Principal and Manager being executed and before the sub-contract between Leighton and Stork was entered into.
In so far as it might be said that Leighton was the trustee of a promise to enter into a trust deed for the benefit of sub-contractors, that promise was fulfilled by the formal execution of the Trust Deed. Clause 16.2 is essentially concerned with progress certificates and progress payments. What the Principal was obliged to pay into the bank account set up pursuant to the Trust Deed were monies which could be categorised as “monies due under a progress certificate … payable to the … Sub-Contractors”. Unless money could be so categorised there was no obligation under cl 16.2 for the Principal to pay it into that account. Given submissions addressed to this court it should be said, though it is obvious, that cl 16.2 did not oblige the Principal to pay all monies payable to Leighton pursuant to the contract into that account. Payments pursuant to a progress certificate issued in accordance with cl 16.2 constituted trust property for purposes of the Trust Deed. In my view there was no other implied trust with respect to obligations imposed on Leighton by cl 16.2.
As the submission for Stork developed on the hearing of the appeal it became obvious that cl 16.4 was central to its claim; it was asserted (and apparently found by the learned trial judge) that cl 16.4 itself created an implied trust. Counsel’s submission was based largely on the following passages in the reasons of the learned trial judge:
“By cl 16.2 and cl 16.4, the State of Queensland agreed with Leighton to pay all moneys payable by Leighton to the sub-contractors and the consultants into the Trust Account.”
“The beneficiaries of the State of Queensland’s promise were the sub-contractors and the consultants. The property of the trust was not just the money once it came into the Trust Account but also the promise to pay monies payable by Leighton to the sub-contractors into the Trust Account.”
“However this ignores the promise made under clause 16.4 that all monies payable by Leighton to the sub-contractors and consultants were to be paid by the State of Queensland into the Trust Account.”
Counsel for Stork went so far in the course of his submissions to assert that any money payable by Leighton to Stork (even pursuant to some arrangement collateral to the sub-contract) had to be paid into the trust account. Clearly that cannot be so; such a payment would not be caught by the words in cl 16.4: “All amounts which are payable by the Manager to the Consultants and the Sub-Contractors are to be paid by the Principal into the bank account …”.
Even if in theory cl 16.4 is wide enough to catch amounts other than monies payable as progress payments to a sub-contractor in accordance with cl 16.2, the amount must still be something which can be categorised as an amount held by the Principal and payable by Leighton to Stork. I have difficulty in seeing how in practice an amount in the hands of the Principal can be categorised as an amount “payable by the Manager to … the Sub-Contractors” unless it is a progress payment as defined in cl 16.2. The mere fact that the Manager may owe the Sub-Contractor an amount pursuant to the sub-contract does not necessarily mean that some part of monies in the hands of the Principal and payable to the Manager can be identified as money “payable by the Manager to … the Sub-Contractors” for purposes of cl 16.4. Ultimately I have come to the conclusion that cl 16.4 does not expand the obligation imposed by cl 16.2. The “amounts” referred to in cl 16.4 are amounts payable by way of progress payments as defined in cl 16.2. It follows that there is no implied trust derived from cl 16.4 considered separately from cl 16.2. To the extent that the passages from her Honour’s reasons quoted above go beyond that they cannot be sustained.
In all the circumstances I reject the submission of counsel for Stork that there was some wider implied trust derived from the provisions of cl 16.4. Again to the extent that her Honour found there to be such an implied trust that conclusion cannot be sustained. In my view when all the relevant documents are read together the only relevant trust was with respect to progress payments. In so far as cl 16.2 may have constituted Leighton a trustee of the promise contained therein that was satisfied by its entering into the Trust Deed and thereafter ensuring that progress payments consequent upon the issuing of a progress certificate were processed through that account. Once the trust was formally constituted there was no basis for asserting the existence of some wider implied trust.
The next question is whether by entering into Deed of Variation No 2 on 22 December 1994 Leighton acted in breach of the trust created by the Trust Deed (or any trust implied from cl 16.2(c) or cl 16.4 of the Agreement Conditions if I be wrong in holding there was no relevant implied trust).
It is helpful to have regard to the state of the project in about December 1994. Progress Claim No 22 deals with work completed to 30 November 1994 and the documents comprising that claim are to be found in the record. The summary shows that to the original Guaranteed Maximum Price of $138,408,178 there had been added adjustments totalling $14,406,950, making the revised Guaranteed Maximum Price $152,815,128. The value of work certified previously amounted to $114,951,886. The new total value as at 30 November 1994 was $129,074,590 making the amount claimed by Progress Claim No 22 the amount of $14,122,704. Thus it can be seen that the work was some 80% complete. The accompanying documents show that Stork’s work was approximately 89% complete. It is true that some sub-contractors (mainly those concerned with finishings and furniture) had yet to perform any work or provide any services pursuant to their sub contracts. But, in my view, it is significant that at the time the Deed of Variation No 2 was entered into the overall work, and in particular the work Stork was required to perform, was substantially completed.
It also seems clear, if only by inference, that the original Guaranteed Maximum Price had not been formally and finally amended to take account of the increase in the scope of work as found by the learned trial judge. Further, as at December 1994 the Principal wanted to lock Leighton into a practical completion date of 12 May 1995, with earlier dates on which parts of the works would become available for use and occupation by the Principal. It was against that background that the Deed of Variation was entered into. It provided for a revised lump sum payment for all the work to be performed by Leighton pursuant to its agreement in the sum of $178M. (Leighton had asked for $198,748,484, but the Principal accepted the advice of a consultant that its exposure should be no more than $178M.) In terms of the deed Leighton had to provide additional security and gave certain specific warranties, including a warranty that the works would be strictly completed in accordance with the time frame specified in the Deed of Variation. It can thus be seen that Leighton received an increase in the total contract price but accepted significant risks by entering into the Deed of Variation.
Relevantly for present purposes the Deed of Variation deleted cl 16.1 and 16.2 of the Agreement Conditions. Clause 16.4 was also deleted and there was substituted for it a clause in the terms quoted in the reasons of the Chief Justice.
It can be seen that the Deed of Variation did not affect the calculation of any payment due to Stork or any other sub-contractor or any entitlement to future payment for work done. What was envisaged was that one final payment would be made directly by the Principal to the Manager who, in turn, would be liable for paying amounts to sub-contractors as they became due and payable. For that latter purpose the trust account would continue to be utilised.
In my view that variation was of a type envisaged by the contract and which could be made by agreement between the Principal and the Manager. I am not satisfied that the payment procedure originally outlined in cl 16.2 and 16.4 was irrevocable. Clause 6 of the Trust Deed, though it used the term “vest” inappropriately, clearly to my mind provided that the Principal could in its absolute discretion terminate the trust created by the Trust Deed.
By the Deed of Variation the Principal agreed to pay Leighton the lump sum (that is, $178M) less 10% retention “and all payments made to the Manager pursuant to the Contract up to and including 21 December 1994” on 22 December 1994. The consideration for that was the Manager’s promise to complete the works in accordance with the contract as revised by that Deed of Variation. In consequence of that provision $45,248,773 was deposited by the Principal in the Manager’s account on 22 December.
It cannot be overlooked that the whole point of Stork’s argument is that that sum of $45,248,773 was trust monies wrongfully appropriated by Leighton. Its whole case here is that Leighton profited from its breach of trust in wrongfully appropriating that sum and that it was entitled to share in that profit by application of the principle derived from cases such as Boardman v Phipps [1967] 2 AC 46.
At the time that payment was made by the Principal to Leighton there was no amount certified as payable to Stork pursuant to cl 16.2 of the Agreement Conditions. No part of it could be categorised as “monies due under a progress certificate … payable to the ... Sub-Contractors”. Further, in my opinion, none of that amount could be categorised as an amount payable by Leighton to a sub-contractor but still in the hands of the Principal; therefore it was not an amount caught by cl 16.4. At the time the payment was made by the Principal to Leighton there was money owing by the Principal to Leighton pursuant to the contract documents as amended but circumstances did not exist which might have obliged the Principal to pay some or all of that amount into the trust account.
As from 22 December 1994 it was agreed between the Principal and Leighton that there would no longer be a process of certifying for a progress payment to a sub-contractor before money would become payable by the Principal. A new regime for payment was substituted. The $45,248,773 could not have been paid into the trust account because none of it was then payable to a sub-contractor. Stork could not in paragraph 59 of the further amended Statement of Claim point to any amount which was due and payable to it as at 22 December 1994. Some of the $45,248,773 would have become payable to a sub-contractor in the future when further work was completed. That would have required future performance of work and the establishing of a right to payment with respect thereto. Clearly at least a significant part of that amount was for the Manager and that entitlement could have been lost if the total sum was paid into the trust account. (See clauses 2.1 and 3 of the Trust Deed). All of that demonstrates that entry into the Deed of Variation and its implementation by receiving that payment did not constitute a breach of trust by Leighton.
Clause 39(b) of the sub-contract between Leighton and Stork executed 1 March 1994 provided for payment of moneys owing thereunder; relevantly it provided:
“The Manager shall pay the Sub-Contractor within fourteen (14) days after the Principal has paid the money in respect of the relevant progress claim into the bank account established under the Trust Deed provided that if:
(i)the Principal fails to pay money into this bank account as a result of a default by the Manager under the Managing Contractor Contract; or
(ii)the Sub-Contractor’s progress claim includes a claim for money which will not be payable by the Principal to the Manager under the provisions of the Managing Contractor Contract;
the Manager shall pay the Sub-Contractor within 42 days of receipt by the Manager of the Sub-Contractor’s progress claim under sub-clause 39(a).”
That clause is important because it recognises that there is an obligation on Leighton to meet progress payments due to Stork regardless of whether or not money is received from the Principal. It covers the situation where, in particular, payments are not received from the Principal through operation of cl 16.2 of the Agreement Conditions. That provision would, in my opinion, apply to the situation which existed after the Deed of Variation No 2 was executed. There is no justification for limiting, as the learned trial judge did, its operation to the original contractual position as between Leighton and the Principal. The reference must be to the contractual position as it existed from time to time.
There are two further observations which should be made on the reasons for judgment of the learned trial judge. Firstly, after referring to the Minutes of the Pre-Award Meeting held on 18 September 1993 she concluded: “This method of payment was agreed between the parties and therefore was part of the contract between Leighton and Stork”. The Minutes, as is evident from the extract quoted in the reasons for judgment, merely record that “payment conditions were discussed”. What was discussed were the conditions spelt out in the various contractual documents. What the minutes record is something descriptive of what is to be found in the contractual documents, and does not record any actual agreement made at that time. It is clear, in my view, that those Minutes cannot be used to support the proposition that the procedures to be followed regarding payment could not be varied by agreement between the parties directly affected thereby. Secondly, the learned trial judge quoted from the Deed of Covenant of 7 March 1994 and concluded from the terms of paragraph 3 thereof: “Because of this provision in the Deed of Covenant, if for no other reason, Stork’s consent would be needed to change or put an end to these obligations.” As the Chief Justice has pointed out that involves an obvious error. It was only Leighton and Stork who acknowledged and agreed in sub-paragraph (a) that “they will duly and punctually perform their respective obligations under the Contract and the Sub-Contract.” The Principal was not so bound by that provision. Further, and more importantly, sub-paragraph (f) expressly stated that “the Principal owes no obligation to the Sub-Contractor unless it otherwise agrees in accordance with this Deed”. That provision would appear to mean that the Principal was not obliged to have regard to the position of a sub-contractor when determining what variations, if any, it should agree to in the contract between it and the Manager.
I agree with the orders proposed by the Chief Justice.
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