Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd - [2000] WASCA 102

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION: THIESS CONTRACTORS PTY LTD -v- PLACER (GRANNY SMITH) PTY LTD [2000] WASCA 102

CORAM: IPP J
STEYTLER J
WHEELER J

HEARD: 8-17 FEBRUARY 2000

DELIVERED : 14 APRIL 2000

FILE NO/S: FUL 55 of 1999

BETWEEN: THIESS CONTRACTORS PTY LTD (ACN 010 221 486)
Appellant
AND
PLACER (GRANNY SMITH) PTY LTD (ACN 009 466 174)
Respondent

Catchwords:

Contracts - Partnering contract for mine exploitation - Termination - Whether respondent estopped from relying on termination clause - Turns on own facts

Contracts - Contract for agreement of rates based on "open book" system - Whether appellant breached duty of good faith - Turns on own facts

Damages - Breach of contract - Turns on own facts

Appeal - Retrial - Damages - Principles

Legislation:

Nil

Result:

Appeal allowed

Representation:

Counsel:

Appellant: Mr W S Martin QC, Mr J A Clifford & Mr S J McComish
Respondent: Mr J Gilmour QC & Mr R J Ainsley

Solicitors:

Appellant: Hollingdales
Respondent: Mallesons Stephen Jaques

Case(s) referred to in judgment(s):

Balenzuela v De Gail (1959) 101 CLR 226
Festic v Atkinson, unreported; FCt SCt of WA; Library No 8484 19 September 1990
Giannerelli & Shulkes v Wraith (1988) 165 CLR 543
Monaco v Arnedo Pty Ltd, unreported; FCt SCt of WA; Library No 940481; 6 September 1994
Transport & General Insurance Company Limited v Edmondson (1961) 106 CLR 23

Case(s) also cited:

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Beach Petroleum NL v Abbott Tout Russell Kennedy (1999) 33 ACSR 1
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Walker & Anor v Henville & Anor [1999] WASCA 117
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514

JUDGMENT OF THE COURT:

The Granny Smith "partnering" contract

In 1989, the appellant (to whom we shall refer as "Thiess") entered into a schedule‑of‑rates mining contract with the respondent (to whom we shall refer as "Placer"). By that contract Thiess undertook to carry out open‑cut mining at Placer's Granny Smith gold mine at Laverton, Western Australia. As the 1989 contract was a schedule‑of‑rates contract, the rates which Thiess was entitled to charge included an allowance not only for the cost of the work but for profit.
Work proceeded under the 1989 contract, but by June 1991 unforeseen problems arose and Thiess was required to carry out work outside the scope of the contract. A characteristic of a schedule‑of‑rates contract is that, if variations to the work occur, the contract sum is adjusted (whether by omission or addition) in accordance with the scheduled rates. Variations of this kind may result in an unexpected increase in the cost of the work and allow the contractor to make windfall profits. The unexpected difficulties Thiess had experienced with the work led to variations and an increase in Placer's cost per bank cubic metre ("BCM") of mined material.
Placer thereupon negotiated with Thiess for a new contract intended to replace the 1989 contract. Placer suggested that the parties enter into a "partnering" contract that would incorporate principles different from a schedule‑of‑rates contract. In pre-contractual discussions and written communications Placer proposed that the new contract be based on a risk‑sharing principle (that is, that the risk of cost fluctuations be shared between Thiess and Placer), that the parties "work in good faith on all matters relating to the contract", and that the contract provide for a fixed profit to be earned by Thiess, being an agreed percentage on costs. These discussions culminated on 13 July 1992 when Thiess and Placer entered into a new contract that replaced the 1989 contract.
The learned trial Judge found that on that date the parties agreed to terms that were to be incorporated in a formal contract to be prepared. That formal contract was executed in July 1993. His Honour accepted that subject to the 1993 formal contract being rectified on an aspect not presently material, that formal contract was the best evidence of the agreement reached on 13 July 1992. The learned Judge found that the contract so constituted came into effect (in accordance with its terms as rectified) on 1 August 1992. His Honour determined that the rights and obligations of the parties as from 1 August 1992 were to be determined by construing the formal contract as rectified. We were informed during the course of argument on appeal that neither party disputed these findings.

The contract is terminated and litigation ensues

In March 1995, Placer terminated the contract. It did so in reliance on a termination clause which entitled it, at its option, and at any time and for any reason it might deem advisable, to cancel and terminate the contract. In that event, Thiess was entitled to receive compensation for unit‑price items and demobilisation, as well as certain defined additional (but limited) compensation.
Thiess then commenced proceedings against Placer, alleging, amongst other things, that Placer's termination of the contract was unlawful and claiming substantial damages in consequence. Placer, in turn, counterclaimed, alleging, amongst other things, that in breach of the obligation of good faith, expressly provided for by the contract, Thiess had falsely represented that certain plant costs, details of which it had provided to Placer, were its genuine estimates of the costs it would incur in carrying out work under the contract. Placer alleged that the plant costs so provided to it by Thiess contained within them elements of estimated profits. Placer claimed damages from Thiess in consequence of this breach.
The learned trial Judge dismissed Thiess' claim and upheld Placer's counterclaim, awarding Placer damages of $4,853,000.
Thiess appeals against the dismissal of its claim and the upholding of the counterclaim.

The notice of appeal

It is not possible to identify with any particularity the grounds on which Thiess appealed. This needs some explanation.
There were some 240 pages of pleadings involving a multiplicity of issues. The evidence was taken during 44 sitting days. There were 30 witnesses, of whom nine were experts. Comprehensive witness statements were filed and each of the principal witnesses was cross‑examined at length. Very many exhibits were tendered, several of them lengthy and technically complex. The parties' closing addresses endured for some two weeks.
In such circumstances, the need for concise and succinct grounds of appeal, focusing on the true issues, is self‑evident. This need was not met. The notice of appeal is 48 pages long. It contains what purports to be 90 grounds of appeal. Most of the grounds, however, are split into several sub‑grounds. In reality, there are some hundreds of grounds of appeal. A great many are repetitive and unnecessarily argumentative. There is no readily discernible structure to the grounds and many range from the speculative to the hopeless. We are indebted to counsel on both sides who agreed, in effect, that the notice of appeal should be completely ignored. It would in fact have been practically impossible for the Court to deal in its reasons with each and every one of the myriad points raised. Nevertheless, this approach, although necessary, has its disadvantages.
An egregious practice appears to be developing in regard to notices of appeal. It seems to be thought by some to be desirable to include in the notice of appeal every argument of which human ingenuity could conceive, irrespective of their merits. In so doing, quantity rather than quality is the lodestar, and the rules in regard to the formulation of grounds of appeal, as explained in Festic v Atkinson, unreported; FCt SCt of WA; Library No 8484 19 September 1990, are ignored. It is to be borne in mind that lawyers owe a duty to the court to exercise due care in the drafting of notices of appeal. They have an obligation to exercise an independent judgment in regard to arguments presented to the court so that the time of the court is not taken up unnecessarily: Giannerelli & Shulkes v Wraith (1988) 165 CLR 543. Moreover, they have a duty to ensure that notices of appeal are drawn in accordance with the law and the practice of the court. Failure to comply with these duties may result in appropriate costs orders and other consequences.
The absence of a useable notice of appeal hindered the Court's understanding of the issues. The appeal took nine days to argue. Had the notice of appeal been in due form, the period could have been reduced.
The absence of properly formulated grounds of appeal means that it is impracticable for this Court to deal with each and every argument raised by counsel on both sides. In the nine days of argument, many points were raised and many issues were addressed. In view of the difficulties to which we have adverted, it is not possible for us to deal in any structured form with every argument. In the circumstances, we shall address only those issues which are necessary to resolve the appeal.

Thiess' appeal against the dismissal of its claim

Thiess contended that, prior to entering into the new contract, Placer represented that it would only rely on the termination clause contained therein to terminate the contract if the mine were closed or if the mine were uneconomic to work. Thiess contended that it altered its position in reliance on those representations and that Placer should be estopped from relying upon the termination clause.
Mr Clifford, junior counsel for Thiess, who presented this argument on Thiess' behalf, said that his argument was premised upon two representations. The first was a representation to the effect that the contract was for the life of the mine, or to similar effect. The second representation involved statements made by Mr Philip Morriss, Placer's resident mine manager, to the effect that he could not see any situation in which Placer would need to invoke the termination clause.
Mr Clifford submitted that the exercise by Placer of its rights under the termination clause was inconsistent with its representation that the contract was to be for the life of the mine. In our view, however, there is no such inconsistency. There are several provisions in the contract itself which indicate that the parties intended that mining be carried on by Thiess pursuant thereto for the life of the mine. But that intention was always subject to the termination clause. This is apparent from the terms of the contract itself. Moreover, at the time the representation in question was made, Thiess requested Placer to remove the clause, and Placer refused. The inference is that Placer would not have agreed to the contract without the termination clause. Plainly, it was prepared to enter into the contract, which was to be for the life of the mine, but subject to its right to terminate under the clause should it wish to do so. Thiess agreed. The representation is to be understood in this context. Accordingly, the argument based on that representation cannot succeed.
Mr Morriss' statement that he could not see any situation in which Placer would need to invoke the termination clause falls into the same category. The mere fact that at the time in question Mr Morriss could not conceive of a situation in which Placer would exercise its rights under the termination clause does not mean that he represented that such a situation would never arise. After all, Placer insisted on the termination clause being inserted in the contract, even though Thiess wished it to be removed. Thiess was well aware of the risks of agreeing to the contract with the termination clause in it, and accepted those risks. Nothing in the evidence supports the proposition that Mr Morriss represented that, despite Placer's insisting on the termination clause being included in the contract, it would not rely thereon. In the circumstances, the submission based on what Mr Clifford described as the second representation also fails and Thiess' appeal against the dismissal of its claim cannot be upheld.

Thiess' appeal against the upholding of Placer's counterclaim

The remainder of these reasons concerns Placer's counterclaim, which was upheld by the learned Judge. Placer relied on more than one cause of action, but it is only necessary to deal with Placer's case put as follows:
1.By an express term of the contract Thiess owed Placer an obligation to act in good faith in the process of deriving the rates according to which remuneration under the contract was to be paid.
2.Thiess represented to Placer that certain plant costs it would incur in carrying out mining operations were its genuine estimates of those costs.
3.Those representations were deliberately false in that the plant costs, to Thiess' knowledge, contained elements of profit.
4.Thiess thereby committed breaches of its contractual duty of good faith.
5.In consequence, Placer suffered damage.
We shall proceed to examine each of these elements.

The duty of good faith and the duty to provide genuine estimates of costs

Clause B1.1.5 of the contract provided:
"The successful operation of this Contract requires that [Thiess] and [Placer] agree to act in good faith in all matters relating both to carrying out the works, derivation of rates and interpretation of this document."
To understand what is meant by the "derivation of rates" and the extent to which the duty of good faith provided for by cl B1.1.5 applied thereto, it is necessary to have regard to certain other provisions of the contract.
Placer was required to provide a "mine plan" to Thiess for the calendar year and the mine plan was to be "formulated in conjunction with" Thiess' representative (cl C1.1.1). As part of this exercise, the fleet numbers required to carry out the "specified material movement schedule" were to be agreed between the parties (cl C1.1.1). Provision was also made for the parties to formulate monthly mine plans (cl C1.1.5). Changes in the fleet size were to be made from time to time in line with projected material movement requirements, and ownership charges were to be varied accordingly (cl C1.1.2).
Base rates for each item of work were to be tabulated for the yearly mine plan (cl C1.1.3). Clause C2.1.2 provided that base rates were to be determined:
"from the yearly mine plan provided by [Placer] and in accordance with the schedules and rates enclosed with Thiess letter … dated 15 July, 1992 [an appendix to the contract]."
Rates shall be determined as detailed in Clauses 2.2 to 2.14 by [Placer] and [Thiess] independently using the same method, who shall then agree said rates which shall be base rates."
Essentially, therefore, the contract provided for several agreements to agree. No point was made by either party as to any uncertainty that in consequence might arise.
Clause C2.1.3 provided:
"Equipment operating costs per hour shall be formulated which are based on relevant historical data or Manufacturer's Handbook figures including long term rebuilds and other values as agreed between both parties. Allowance is to be made for movement of machines during and between shifts and maintenance … "
Clause C2.1.4 provided:
"Labour hourly costs which shall reflect actual costs to [Thiess] (with due allowance for add on costs and labour multiplier) shall be formulated and agreed as per Appendix C/4."
Drill and blast, sampling and pre-split base rates were to be reviewed on a quarterly basis commencing in January 1993 (cl C2.1.5). Provision was made for monthly and quarterly reviews of shovel/truck productivities and resulting base rates per BCM (cl C2.1.6). Clause C2.1.8 and cl C2.1.9 contained formulae relating to the revision of BCM rates.
Clause C2.1.1 to cl C2.1.12 reflect a scheme for the determination of base rates, equipment operating costs, labour costs and productivities, as well as for the revision of rates (and elements relating to those rates, such as productivity factors).
Clause C2.2 dealt with excavate, load and haul rates. Clause C2.2.1 to cl C2.2.2 provided for the determination of various factors relating to productivity. Generally, those factors were to be agreed by the parties. Clause C2.2.3 provided that BCM rates were to be determined in accordance with a computer modelling program known as Fleet Production and Cost Analysis ("FPC"), using agreed hourly rates. Clause C2.3 dealt with bench sheeting and laid down the way in which costs in respect thereof were to be established and reviewed. Ground‑engaging costs, ownership costs, drill and blast costs, miscellaneous drill and blast costs, ancillary works, other works, "overheads", mobilisation and demobilisation costs, and back‑charges were dealt with in similar fashion in cl C2.4 to cl C2.14.
Clause C3.0 dealt generally with measurements and payments, cl C3.4 with rise‑and‑fall, and cl C3.6 with profit. Clause C3.6.1 provided for "a percentage mark‑up as agreed between [Thiess] and [Placer]" to be applied to certain specified base rates. Clause C3.6.2 provided that the mark‑up should not apply to overheads and ownership costs. Clause C3.6.5 provided that the percentage mark‑up for profit would be in accordance with a certain schedule, and that schedule provided:
"The percentage mark‑up for profit is 5 per cent of the total value of turnover for the month."
The contract, therefore, covered a multitude of items in respect of which costs were to be incurred and rates charged. It also specified the profit to be made and how that profit was to be calculated. While the base rates at the commencement of the contract were agreed (as contained in Thiess' letter of 15 July 1992), careful and detailed provision was made for the review of those rates. Generally, according to the contract, the rates were to be reviewed quarterly, and there was provision for particular rates to be reviewed monthly. Additionally, the base rates were to be determined from each yearly mine plan.
The clauses that provided for rates to be reviewed and varied in line with such matters as projected material movement requirements, changes in haul, road layouts and profiles, changes in mining strategy, and in productivities are significant. In our opinion, these provisions give rise to the inference that the contract, as a matter of general policy, was intended to provide a mechanism for payment by Placer of rates that were to be as close as reasonably possible to the actual costs incurred by Thiess. Changes in circumstances might, however, occur that would lead to a change in the actual costs before a review took place. Such changes would inevitably affect the overall profit Thiess would make as, for a time, the agreed rates would not coincide with actual costs.
Put in another way, the contract provided for the agreement of rates, from time to time, in advance of work done. To that extent, it contemplated that agreed rates would be based on estimates of the costs of the work to be done. The elaborate provision for cost reviews reflects an intent that, should the agreed rates prove to be more or less than the costs incurred in the period succeeding the last relevant review, the rates would be varied ‑ by agreement ‑ as from the next review so as to reflect the costs incurred in that period. The rates so varied would represent the estimated costs for the future period. Accordingly, no matter how circumstances might change, the review system provided a mechanism whereby, within a reasonable time after each such change, Placer would pay Thiess' actual costs. This was a reflection of the idea that the risks in the mining operations should be shared.
Implicitly, the parties were required to cooperate in the establishment of rates based as far as reasonably possible on actual costs. This inference is consistent with the scheme of the contract as a whole and is reinforced by cl C2.1.3 which provides for the formulation of equipment operating costs "based on relevant historical data …" . The relevant historical data was data that Thiess possessed as to its past costs. Thiess was required to provide its historical data to enable equipment operating costs to be formulated and agreed, such data being an important criterion governing such formulation and agreement.

The contract provided guidelines as to the bases of the several agreements that were required to effect variations to the rates through the review process. Clause B1.1.5, which required both parties to act in good faith in all matters relating to the derivation of rates, is relevant in that respect.
The scheme of the contract as a whole and the obligation of good faith contained in cl B 1.1.5 required Thiess at each review to disclose all facts relevant to the establishment of rates based on actual costs. For example, if costs had reduced, Thiess was obliged to disclose that fact, so that the parties could agree upon a variation of rates that reflected the lower costs.
In our opinion, it follows that the contract required Thiess ‑ in regard to each review ‑ to provide Placer with a genuine estimate of its costs for the purpose of agreeing the rates in accordance with its terms. Placer did not allege or rely upon a breach of such an obligation in counter‑claiming for damages. But that obligation gives content to the obligation of good faith, the breach of which Placer did rely on (and is also relevant to issues of causation, as we shall explain later in these reasons).
As mentioned, Placer contended that, in the course of agreeing upon variations as to rates, Thiess knowingly misrepresented to Placer that certain costs were its genuine estimate of costs whereas those costs included elements of profit. In our opinion, for the reasons we have expressed, misrepresentations of the kind alleged, made after the contract had been entered into, constituted breaches of cl B1.1.5.

The representations in the April submission

The representations in question were contained in a document referred to as the "April submission" (which preceded the entering into of the contract in July 1992). The learned Judge found that Thiess represented to Placer that the rates in the April submission were its genuine estimates of costs. Thiess challenged this finding. As the rates contained in the April submission were later incorporated in the contract, and certain rates reviews were based on those rates, the finding was crucial to the eventual decision that the breaches alleged by Placer had been established.
In dealing with this issue, we shall set out the relevant history of the negotiations. We emphasise that when we refer to events prior to the contract, we do so to recount the chain of events, which assist in construing statements made by Thiess to Placer said to constitute misrepresentations. We do not do so on the basis that such matters are admissible in construing the contract.
The concept of a "partnering"contract is developed
The history commences in the latter half of 1991, when Mr Morriss formed the view that it would be in Placer's interests to enter into a new "partnering" contract with Thiess to replace the existing 1989 contract. On 12 September 1991, Mr Morriss wrote to Mr Steven Schalit, Thiess' project manager, setting out "the basic premises" for the new contract as being:
"1. [Placer] recognises the right of [Thiess] to make a profit;
2.the nature of the contract will remove the ability of [Thiess] to make "windfall" profits;
3.[Placer] shares risks which are normally incorporated into [Thiess'] rates; and
4.[Placer] and [Thiess] agree to work in good faith on all matters relating to the contract."
Other "concepts" referred to in the letter were that rates were to be derived from an "open‑book" system using identified data, and infrastructure costs (including overheads) were to be paid for as an agreed annual amount that would not "influence BCM rates".
Thereafter, Mr Morriss submitted a draft of the proposed contract to Thiess. As the learned Judge pointed out, annexure B to the draft included provisions for determining base rates "which shall not include any profit component". An agreed profit margin was to be applied to the "basic rate". The draft reflected the principle that no profit margin would be applied to overhead costs.
On 29 November 1991, a meeting was attended between representatives of Thiess and Placer. At that meeting, Mr Morriss signed a confidentiality agreement on behalf of Placer and Thiess disclosed information about its rates. According to Mr Morriss' witness statement (which became his evidence‑in‑chief):
"I was told by Thiess (I think Witton) that Placer would be charged the plant department rates, which were the hire rates of equipment from the plant department to the Thiess operations department."
Mr Martin QC, senior counsel for Thiess, submitted that the learned Judge erred in accepting the evidence of Mr Morriss in this respect, but we are not persuaded that his Honour misunderstood the evidence, or did not have regard to the context in which Mr Morriss spoke to Mr Witton, or in any way misused his advantage as trial judge.
At the meeting, Thiess explained how its plant department fixed its rates. That was dealt with by the learned trial Judge as follows:
"The function of the plant department was to obtain, service and repair plant and equipment and to 'hire' it to the various operating departments. Its objective was to break even at the end of every year in each operating area. Western Australia was one such area.
The plant department charges were the sum of a number of components, which were assessed separately. These included operating costs, such as fuel and oil, servicing, charges for major repairs and other repairs and tyre and undercarriage costs. They also included depreciation and ownership costs, relating to finance and insurance.
But certain costs associated with the operation of plant and equipment were not included in the internal rates charged by the plant department. They included the cost of repairing accidental damage, the repairing or replacing of ground engaging tools and the costs associated with excessive tyre or undercarriage wear. Nor did the internal charge rates include any costs attributable to off‑site workshop overheads.
Each of the costs not included in the plant department rates was a real cost. It was therefore the responsibility of Thiess' estimators to make such allowances as they thought fit, based on their knowledge of each job, in deriving a price to charge the client.
In so doing, they would have in mind that although the plant department rates were varied periodically (12 monthly in 1991‑2) there would normally be no opportunity to pass on to the client any increases in the internal costs."
As the objective of the plant department was to "break even" at the end of every year, it was careful to make an informed and genuine estimate of the costs likely to be incurred in respect of the plant it "hired" out to the various Thiess operating departments.
Significantly, as mentioned by his Honour, Thiess' plant department rates did not include all its actual operating costs in regard to its plant. By 29 November 1991, Mr Morriss knew that certain costs were not included in Thiess' plant department rates. In fact, the costs not included comprised excess accident damage, freight costs, excess costs for tyres and undercarriages, ground‑engaging tools and workshop costs. Of those, Mr Morriss was told that ground‑engaging tool costs and freight costs were to be treated as "BCM‑related". The costs that were BCM‑related would not be recovered through the plant rates (which were not so related) but would be charged for on the basis of the amount of material mined.
At that time, Placer was about to prepare its own mining study to calculate the cost of carrying out the mining work. It was thinking of performing the mining work itself and not giving it to an outside contractor. Mr Morriss explained:
"I think that we were trying to establish what the true costs were which constituted or served to accumulate to give us the costs per operating hour of each piece of equipment and it was important that we understood what wasn't included and how Thiess normally would deal with that so we could then make sure we included those extras from our side so as to not underestimate the total cost of the mining later on for things related to ground engaging [tools] and other matters."
Mr Morriss was questioned whether, at the meeting of 29 November 1991, he had asked specifically what items were not covered by the plant department rates. He replied:
"I think it was done the other way round. We were basically asking, 'You tell us everything that is included and then we will be able to make a list of anything that is excluded.' Some of the exclusions came about because we were being shown all of the things that were included."
In other words, once Mr Witton told Mr Morriss that Placer would be charged the plant department rates only, and that ground‑engaging tool costs and freight costs would be treated as BCM‑related, Mr Morriss knew that he would have to establish for himself the costs of the remaining omitted items (that is, for the Placer owner‑mining study).
His Honour found that, at the meeting, Mr Witton did not say anything that committed Thiess to charge its plant department rates. In other words, as Mr Morriss said of the meeting, "It was just an explanation meeting. That was when Thiess was showing us how they put their rates together." The statement was merely a representation as to Mr Witton's then state of mind concerning what Thiess might do in the future.
The learned trial Judge found that, by 29 November 1991:
"Mr Morriss had proposed … a form of contract in which Placer would pay Thiess a profit margin over its expected costs. But as at 29 November, there was no agreement to that effect … [The parties] had entered into the confidentiality agreement. But they had barely embarked on the 'open book' analysis: and they had yet to negotiate to derive rates."
At the meeting of 29 November 1991, Mr Morriss' recorded in a note that the site would be given a credit if the actual costs were lower than projected, and charged if the costs were higher. The learned trial Judge said that according to Mr Morriss "the idea was that any such fluctuations would be accommodated in the review of plant rates carried out six‑monthly by Thiess' internal plant department". Mr Morriss' testimony was that:
"Thiess … would, therefore, update that information and given that it was factual information, that would then form the basis for amending the rates … "
The learned Judge found that this was a fair summary of what was said by Thiess representatives at the meeting. The basis of that finding was the evidence of Mr Morriss himself. Mr Martin submitted that this finding was erroneously made, as a note by Mr Morriss made at the time of the meeting, to which the learned Judge referred, mentioned only tyres and undercarriage costs. In our view, the note is ambiguous but Mr Morriss' testimony is not. Mr Morriss said in this regard:
"[T]he idea was that the reviews that were going to be taken every 6 months were going to basically give us a level playing field on these types of items."
By "these types of items", Mr Morriss was referring specifically to tyres and undercarriages, but it is plain from the overall context that he had all costs in mind when referring to "the reviews that were going to be taken every 6 months". That his answer was so intended by Mr Morriss and so understood by senior counsel who represented Thiess at the trial is apparent from an exchange that occurred shortly after Mr Morriss had referred to the reviews that were going to occur. Senior counsel asked, in relation to repair labour costs:
"Is this another instance where you thought that the quarterly reviews would solve the problem of what to do about the internal plant department's rates to the site going up or down?"
Mr Morriss replied:
"Thiess, because they reviewed their plant department rates twice each year would, therefore, update that information and given that it was factual information, that would then form the basis for amending the rates."
Generally, Mr Morriss' testimony established that, by the end of the meeting of 29 November 1991, Thiess and Placer understood that, under the proposed "partnering" contract, reviews of rates would take place on a regular basis (quarterly and six monthly reviews having been discussed) and those reviews would consider any alteration in costs, whether up or down, and appropriate alterations to the rates would be agreed.
The April submission is produced.
On 24 January 1992, Mr Morriss sent a revised mining budget for 1992 to Mr Schalit. He said in his covering letter that that information:
"should provide enough detail to enable you to rework the 1992 mining costs using the new contract concepts."
The "new contract concepts" were the concepts set out in Mr Morriss' letter of 12 September 1991. That letter, as we have mentioned, set out the principles, which underlay the "partnering" contract theory. Speaking generally, that theory was based on the proposition that Placer and Thiess would share the risks which normally would have been incorporated into the rates agreed for a schedule‑of‑rates contract and no "windfall" profits would be made. Every attempt would be made to establish the actual costs of the work and Thiess would earn an agreed profit percentage on those actual costs.
In response to Mr Morriss' request, Thiess prepared the April submission which was given to Placer in late April 1992. Thiess conceded that the rates in the April submission were higher than its plant department rates. At the trial, Placer accepted that this would not be a cause for complaint if the rates submitted reflected genuine cost estimates. This concession was properly made as the plant department rates were not the only genuine estimates that could be made.
The relevance of the 12 September 1991 letter.
The learned Judge said in regard to Mr Morriss' letter of 24 January 1992 that the request to Thiess to rework the 1992 mining costs using the new contract concepts "could only be construed as an invitation to Thiess to produce genuine estimates of its mining costs as a basis for a further submission". His Honour held further that:
"[W]hen Thiess produced its April submission, the parties were negotiating on the basis that Thiess would provide genuine cost estimates. This resulted from Thiess' acceptance of the principles embodied in Mr Morriss' letter of 12 September 1991."
Mr Martin submitted that the learned Judge erred in finding that the April submission was produced when the parties were negotiating on the basis that Thiess would provide genuine cost estimates.
His Honour relied on two bases for his conclusion. The first was Thiess' acceptance of the principles embodied in Mr Morriss' letter of 12 September 1991 (those principles, according to his Honour, being that Thiess would provide genuine cost estimates to Placer). The second was his observation that "[a]ll material Thiess witnesses agreed with this proposition".
Mr Martin submitted that the inference that the learned Judge drew from the letter of 12 September 1991 was not open to his Honour (although he did not challenge the finding that Thiess accepted the principles contained therein). He pointed out that the letter was no more than a proposal, a very early exploratory letter. He drew attention to the fact that the base rates were to be derived by negotiation and submitted that the "open‑book" agreement was designed simply to facilitate this process. In essence, Mr Martin submitted that the letter, properly construed, was merely a suggestion that the base rates were to be derived by computer program after the project plant rates were negotiated and agreed. He submitted that no inference arose from the letter to the effect that Thiess was obliged to make genuine estimates of its costs in order to facilitate the negotiation and agreement of plant rates. He contended that Thiess was entitled to put forward any figures that it wished as part of the negotiation process.
We do not accept these submissions. Generally, our reasoning is analogous to that which led us to conclude (under the heading "The duty of good faith and the duty to provide genuine estimates of costs") that in seeking to agree rates pursuant to the various provisions of the contract that envisage such agreements, the parties were obliged to act in good faith in estimating the future costs. We shall, nevertheless, deal with Mr Martin's particular submissions in this respect.
As indicated, as set out in the letter of 12 September 1991, the basic premises for the partnering contract were that Thiess should make an agreed profit on the actual costs of mining. This did not involve a standard cost‑plus contract, as the parties contemplated that Placer and Thiess would share the risks involved. The rates based on actual costs were to be established by taking into account the "open‑book" analysis and then by negotiation ‑ against the background that Thiess and Placer were "to work in good faith on all matters relating to the contract". In this regard it is not without relevance that Mr Schalit testified that the term "open-book" (used in the letter of 12 September 1991) is known in the mining industry. He explained:
"It's to describe how you actually get your mining rates, so when you put the tender together, we would then, instead of where you would normally put a profit mark‑up on your actual costs, is to expose your costs and how you actually arrive at those costs."
The whole point of the "open‑book" analysis was to allow Placer to determine how Thiess derived its actual costs for the relevant pieces of mining equipment. In this context, the reference to "negotiation" in the letter of 12 September 1991 is not to negotiation that would be unconstrained in the sense that each party would be at large to negotiate for agreed costs in the usual way. As the whole aim of the contract was to establish rates that would be an estimate of the anticipated actual costs of the mining operations, and would not give rise to "windfall" profits, the inference to be drawn is that the open‑book analysis was to enable that to be done. The parties would be expected to "work in good faith" to agree on the costs on the basis of what would be genuine estimates of those costs. Each party would know the other's genuine estimate and the negotiation would take place in that context. The negotiations would not occur as if in a vacuum, with each party trying to achieve the best possible result for itself, without regard to what each expected the costs to be, and without regard to the "basic premises" of the intended new contract. Once Thiess accepted the principles embodied in the letter of 12 September 1991, it followed that it accepted that the costs it would put forward for the purposes of negotiation would be a genuine estimate by it of its true costs, and that those costs would be so understood by Placer.
We would arrive at the foregoing conclusion by reference to the terms of the letter of 12 September 1991 alone, but that conclusion is fortified by the following other matters.
As the plant department rates were a genuine estimate of costs, Mr Witton's statement to Mr Morriss at the meeting of 29 November 1991 that Placer would be charged the plant department rates was consistent, generally, with the "basic premises" and "concepts" of the proposed partnering contract as set out in the letter of 12 September 1991 and, in particular, with Thiess' charges being based on genuine estimates of costs.
The drafts of the contract that had been submitted by Placer to Thiess and discussed between them also reinforced the "basic premises" and "concepts" set out in the letter of 12 September 1991. That is because those drafts incorporated matters such as the obligation to act in good faith, the specification of an agreed profit percentage on costs, provisions involving the regular reviewing of costs, as well as the formulation of costs "based on relevant historical data or Manufacturer's Handbook figures".

In our opinion, the learned Judge was entirely justified in concluding that Thiess' acceptance of the principles contained in the letter of 12 September 1991 meant that "[w]hen Thiess produced its April submission the parties were negotiating on the basis that Thiess would provide genuine cost estimates".
The Thiess witnesses acknowledge that a genuine estimate of costs was required.
Mr Schalit asserted that Thiess was entitled to put forward its "keenest" or "best" estimate of costs, but acknowledged that such an estimate nevertheless was required to fall within the concept of a genuine estimate of costs. In a series of answers in cross‑examination he accepted that the letter of 12 September 1991 required the parties to exercise good faith in relation to the proposed contract, that good faith was to be exercised in relation to the derivation of plant rates, and that Thiess was to provide Placer with an honest estimate of the costs likely to be incurred by it.
Mr Schalit accepted that it was understood in the discussions he had with Mr Morriss prior to October 1991 that:
"There was to be the capacity to be able to, as I understood it, sit down on an annual basis, review the plant rates that you had used for the previous year, and make any adjustment to those plant rates where they had either fallen short or where they had overrun or underrun."
He agreed with the proposition that the purpose of the reviews was:
"to adjust the rates such that they weren't causing a loss to Thiess on the one hand or were more than the best estimate of likely operating costs and thus charging Placer too much on the other hand".
Mr Parsons, Thiess' mining manager in Western Australia, said that in October 1991 Placer was examining the possibility of mining at Granny Smith itself and that Thiess was "in competition with owner mining". In that context, Thiess was required to submit to Placer its estimated costs of carrying out the work, derived principally by reference to historical data (namely, actual costs incurred in the past) and in so doing Thiess was required to make "a genuine and honest estimate of costs arrived at on [the basis explained] and with no component for profit." Mr Parsons' evidence was to the effect that his understanding of Thiess' obligation to provide a genuine estimate of costs was based on "all the discussions from day one".
Mr Jukes was Thiess' Brisbane‑based general manager. His understanding of Thiess' obligations was to the same effect, as was that of Mr Trio (who was Mr Parsons' immediate superior).
Mr Martin submitted that the evidence of Messrs Schalit, Parsons, Jukes and Trio, to which we have referred, was inadmissible in aid of the construction of the contract. That may be so, but their evidence is admissible to establish that, in pre‑contractual discussions, Thiess represented to Placer that the rates in the April submission were based on a genuine estimate of costs. That evidence supports the finding of the learned Judge that all material Thiess witnesses agreed with the proposition that Thiess accepted that when it produced the April submission, the parties were negotiating on the basis that Thiess would provide genuine estimates of costs.
The plant rates in the April submission were the plant department rates.
There is other evidence that supports the finding that the April submission was produced when the parties were negotiating on the basis that Thiess would provide genuine estimates of its costs, namely, evidence that led the learned Judge to decide that the plant rates in the April submission appeared to be the plant department rates. That was relevant because the parties well knew that the plant department rates were a genuine estimate of Thiess' costs in regard to those items the subject of the rates.
There were two principal reasons for his Honour's decision on this issue. First, he noted that the form of the April submission was as follows:
"The April submission was a collection of some 54 pages containing information about all aspects of the work to be carried out by Thiess. The information included plant rates for 1992‑94 for the various items of equipment to be used on the site. The plant rates were broken down into their components, for both operating and ownership costs."
His Honour found that the form of the breakdown of plant rates in the April submission was the same as the breakdown of the plant department rates Thiess disclosed to Mr Morriss at the meeting of 29 November 1991. He held that it was reasonable for Mr Morriss to infer from this that the rates in the April submission were the plant department rates. Thiess' conduct in providing the April submission with the breakdown of rates in that form was responsible for that inference arising.
His Honour considered, further, that that inference was reinforced by Mr Witton's statement to Mr Morriss at the meeting of 29 November 1991 that Thiess intended to charge its plant department rates. It was reasonable for Mr Morriss to assume that the April submission was in accord with what he had so been told. As the learned Judge observed:
"Placer did not enquire how the rates had been derived, but it had no reason to do so. As I have found, it was reasonable for Mr Morriss to believe, as he did, that the plant rates contained in the April submission had been derived in the same way as those disclosed at the meeting of 29 November 1991."
Mr Martin criticised these findings and pointed out that no document was produced in evidence as being the document given to Mr Morriss at the meeting of 29 November 1991 reflecting the plant department rates, and no document of the kind in question was discovered by either party. It seems to us, however, that the learned Judge was referring not so much to a particular document disclosed at the meeting of November 1991, but merely to the fact that the form of the breakdown of rates in the April submission was the same as the breakdown in costs that Thiess had given to Mr Morriss at the meeting of 29 November 1991. In our opinion, it was open to his Honour to make such a finding.
The omission of costs from the internal plant department rates.
Mr Martin relied on the fact that prior to proffering the April submission, Thiess informed Placer that the plant department rates did not cover all Thiess' plant costs. Mr Martin submitted that it was a basic premise of the contract that Thiess would make a profit on all its costs. Hence, he argued, Thiess was entitled to adjust its plant department rates to cover all its costs and this is what it did in putting forward the April submission. He argued that in the light of Placer's knowledge that the plant department rates did not cover all Thiess' plant costs, it could not have believed that the April submission merely reflected the plant department rates. He submitted that Placer should have realised that, in the April submission, Thiess would make allowance for the costs omitted from the plant department rates.
Mr Martin based his argument specifically on the omission from the plant department rates of the costs of ground‑engaging tools, freight costs, accidental damage to plant not covered by insurance, excess costs for tyres and undercarriages, off‑site workshop costs and plant department administration charges. We shall deal with each of these.
We have mentioned that at the meeting of 29 November 1991, Mr Morriss was told that ground‑engaging tools and freight would be treated as BCM‑related. In other words, ground‑engaging tool costs and freight costs would be recovered through the rates payable on the basis of the amount of material mined and not through the rates payable as plant operating costs. This concept was eventually incorporated into the contract. Clause C2.4 provided for ground engaging tool rates on a BCM basis, as did cl C2.11 for freight charges. Ground‑engaging costs for ancillary equipment were provided for by cl C2.9, as part of payment for ancillary equipment.
Rates for equipment, tyre and undercarriage excess relating to major equipment were provided for by cl C2.4.1 by way of BCM rates, and rates for equipment tyre and undercarriage excess involving ancillary equipment were dealt with in cl C2.9 as part of payment for ancillary equipment.
This leaves the excess costs of accident damage, off‑site workshop costs and plant department administration charges as costs not dealt with in the April submission or in the contract. Before discussing these items further it is relevant to note that there were several other items not covered by the plant department rates but which were expressly dealt with in the contract. Thus, labour costs were dealt with in cl C2.1.4 of the contract and were recovered generally as part of the hourly rates relating to excavate, load and haul, as part of equipment labour costs and as part of the hourly labour rates relating to drill and blast rates. Drill and blast consumables costs were dealt under cl C2.6 as part of the drill and blast rate, the cost of emulsion was dealt with in cl C2.8, as part of miscellaneous drill and blast costs, the cost of sampling was dealt with in cl C2.7 as a cost per linear metre and monthly explosives/vehicle costs were dealt with in cl C2.8. Several other costs were dealt with as part of site running costs and site overheads under cl C2.11, these included site office running costs, small tools, site salaries, site accommodation costs, site staff and vehicles costs, insurance for public liability, and accommodation of mechanical staff and fitters.
To summarise at this stage, all the items dealt with in the plant department rates were specified in the April submission and rates were accorded to each. These rates formed the basis of the contractual rates. All costs not covered by the plant department rates, save excess costs of accident damage, off‑site workshop costs and plant department administration charges were specified separately in the contract. Thus, the rates in the contract (which were based on the April submission) covered all Thiess' costs except for excess accident damage, off‑site workshop costs and plant department administration charges.
Nothing was said about excess accident damage in the pre‑contractual discussions between Thiess and Placer, and Mr Morriss assumed that a provision for excess accident damage would be absorbed into Thiess' profit margin. Historically, the amount of costs incurred under this head was insignificant. The learned Judge considered that to be reasonable. In our opinion, he was entitled to come to that conclusion. That is to say, there were valid reasons for omitting excess costs of accident damage from the April submission and the contractual rates.
The contract dealt expressly with on‑site overheads, but it made no reference at all to off‑site overheads. The trial Judge held that, prior to entering into the contract, Thiess agreed with Placer that it would remove any charge for off‑site overheads. That is a significant finding, not only because it is relevant to the argument advanced by Mr Martin, but because Thiess contended that at least part (if not all) of its costs found to have been misrepresented was a genuine allowance for off‑site overheads. Mr Martin submitted that the learned Judge erred in finding that Thiess had agreed to exclude all its off‑site overheads from its costs. In order to decide this issue it is necessary to examine the history of the relevant negotiations.
The issue first surfaced in the April submission. The learned Judge described the context as follows:
"The submission contained summaries for each year. These showed what appeared to be the costs of mining, drill and blast, ancillary equipment and other matters. These were added to produce a total. Beneath the total, the words 'Perth and Brisbane office 5.87% plus 5% profit' appeared against a figure which was 10.87% of the total. This was added to the total to produce a 'Grand Total', which was compared with the equivalent costs under the existing contract. On its face, therefore, the April submission appeared to show Thiess' expected costs of mining. When a figure is added for profit and overheads, it is reasonable to assume that the figure to which it is added contains neither profit nor overheads."
In other words, the learned Judge considered that the phrase "Perth and Brisbane office 5.87%" referred to all Thiess' overheads not otherwise dealt with in the April submission. In this regard, the April submission made separate provision for on‑site overheads (therefore, the phrase referred to all off‑site overheads).
Clause C3.6 of the 25 February 1992 draft of the contract provided for both profit and overheads to be recovered by way of a margin applied to certain base rates. The April submission showed margins of 5 per cent and 5.87 per cent for profit and overheads (ie., by inference, off-site overheads) respectively.
On 27 May 1992, Placer considered a report which had been prepared on its behalf concerning whether it would be more economic for it to undertake owner‑mining at the Granny Smith project rather than to arrange for mining to be carried out by an independent contractor. On that date, Placer, in effect, decided that owner‑mining should be adopted. Following that decision, Mr Morriss telephoned Mr Trio and told him that the owner‑mining decision had been taken. Mr Morriss then told Mr Trio, "If you keep your off‑site overheads then you don't have a chance of doing it." On 29 May 1992, Mr Jukes telephoned Mr Morriss and told him that Thiess would agree to the removal of the 5.87 per cent for off‑site overheads from its tender. The question is then whether the 5.87 per cent for off‑site overheads, the subject of the discussion between Messrs Morriss and Jukes, included all of Thiess' off‑site overheads or only those relating to its Perth and Brisbane offices.
Thiess' reply and defence to counterclaim originally referred to the offer to remove "off‑site overheads" if it were awarded the contract. The reference to an unqualified offer was amended shortly before trial so that reference was made (in substance) to the removal of "the Perth and Brisbane office overheads". The reason for the amendment was not disclosed.
The learned Judge carefully analysed the relevant evidence and found that Mr Jukes told Mr Morriss only that Thiess would remove the 5.87 per cent margin "for off‑site overheads". His Honour did not accept Mr Jukes' evidence that Mr Morriss had been told that the term included only the Perth and Brisbane office overheads. Mr Morriss said that he assumed that the 5.87 per cent covered all off‑site overheads. His assumption was based on the fact that the April submission made specific provision for on‑site overheads; once Thiess proposed to charge 5.87 per cent for Perth and Brisbane office overheads, the inference was that the 5.87 per cent covered all off‑site overheads for which Thiess intended to charge. The learned Judge accepted that Mr Morriss made that assumption and said that the assumption could only have been reinforced by Mr Jukes' offer to remove the 5.87 per cent for "off‑site overheads". His Honour concluded that Thiess had encouraged Mr Morriss to make that assumption. In our opinion, the learned Judge was entitled on the evidence to come to this view.
It is significant that "off‑site overheads" were not referred to as a specific cost item in the breakdown of plant operating costs provided by Thiess to Placer throughout 1991, nor was it disclosed as part of the plant operating costs in the April submission (where, as mentioned, specific provision was made for on‑site overheads). Thus, it appeared from the April submission that Thiess was not intending to charge for off‑site overheads as part of its plant operating costs, a specific charge had been made for on‑site overheads, and the only charge it was making for off‑site overheads was the 5.87 per cent. That, in our view, is the inevitable inference to be drawn from the history we have outlined, the various statements made by the Thiess representatives to Placer to which we have referred in this connection, and the form of the April submission itself.
The learned trial Judge, in his reasons, referred to evidence by Mr Jukes that he had calculated how the 5.87 per cent had been derived, and that that percentage included only the Brisbane and Perth overheads. His Honour commented as follows:
"That evidence was given gratuitously, when Mr Jukes was asked to say when he had first drawn the distinction between off‑site overheads on the one hand, and Perth and Brisbane overheads on the other hand. Although the answer was not challenged, I do not accept it. Given the importance which Thiess attaches to this point, I should have expected it to demonstrate by calculation that the 5.87% covered only the office overheads. It has not attempted to do so."
Mr Martin submitted that the reasons given by the learned Judge for not accepting Mr Jukes' evidence in that respect were unconvincing. Having regard to all the evidence relevant to this issue, however, we are of the view that his Honour was entitled to come to the conclusion that he did. Mr Martin submitted also that Mr Parsons gave evidence to the same effect as Mr Jukes in regard to the overheads covered by the 5.87 per cent. His Honour, however, rejected Parsons generally as a witness of credit, and his testimony advances the issue no further.
It follows therefore that the learned Judge's finding that Thiess agreed to remove all off-site overheads from the contract stands.
In the circumstances, there were good reasons to omit from the contract rates for excess costs of accident damage and off-site overheads. The other costs omitted from the plant department rates were dealt with in the contract in other ways. Accordingly, Thiess' argument based on the costs omitted from the plant department rates is not upheld.
The provisions for review under the contract.
Thiess pointed to the fact that it was inevitable from the very nature of costs estimates that, on completion of the work, it would be discovered that not all the estimates were accurate. It was to be expected that, after mining commenced pursuant to the contract, some of the estimated costs would be found to be less than the actual costs incurred. That being so, there was good reason for Thiess, in making a genuine estimate of costs, to increase the plant department rates to cover contingencies. It was submitted that this, in fact, is what Thiess did when it increased the rates in the April submission. Placer, on the other hand, contended that there was no reason so to increase the rates, as the contract was intended to and did provide a mechanism for rates to be adjusted during the course of the contract should the costs initially agreed prove to be less than the actual costs incurred.
Inasmuch as the increased rates involved principally excavate, load and haul rates, this issue turned on cl C2.2.5 of the contract, that being the clause dealing with rate reviews relating to excavate, load and haul. This clause provided:
"Quarterly reviews (as per clause 2.1.11) of simulation parameters shall commence in January 1993."
Clause C2.1.11 provided:
"There shall be quarterly reviews of actual and calculated shovel/truck productivity commencing in January 1993. Any adjustments so made shall not be applied retrospectively."
The reference to shovel/truck productivity was a reference to cl C2.1.6, which provided:
"The shovel/truck productivities and resulting base rates per BCM shall be eligible for review in the following two areas:
(a) Monthly Variations – Clauses 2.1.8, 2.1.9, 2.1.10;
(b) Quarterly Review – Clause 2.1.11."
The learned trial Judge drew attention to the word "resulting" in cl C2.1.6, which qualifies "base rates per BCM" and noted:
"Base rates are to be reviewed only if warranted by changes in productivity."
It was submitted on behalf of Thiess that, just as cl C2.1.6 provided for reviews only in the event of alterations in "productivities", so did cl C2.1.11. On this basis there would then be no mechanism in the contract for reviewing rates on grounds other than alterations in productivities.

The learned trial Judge did not accept this argument. His Honour's reasoning was as follows:
"In my view, the expression 'as per clause 2.1.11' is used in cl 2.2.5 merely as a shorthand.
Clause 2.1.11 sets out that there shall be quarterly reviews of productivity commencing in January 1993 and that any adjustments so made shall not be applied retrospectively. The formulation of cl 2.2.5 is thus a convenient short way of providing:
'There shall be quarterly reviews of simulation parameters commencing in January 1993. Any adjustments so made shall not be applied retrospectively.'
I am therefore satisfied that cl 2.2.5 contemplates quarterly reviews of all simulation parameters, including operating costs."
His Honour went on to point out that this construction was consistent with other provisions of the contract that provided for quarterly reviews of various kinds of other operating costs. In this regard, cl C2.3.3, cl C2.4.2, cl C2.6.3, cl C2.7.2 and cl C2.9.7 provided for quarterly reviews of bench and waste dump sheeting costs, ground‑engaging costs, drill and blast rates, sampling base rates and ground‑engaging base costs for ancillary equipment, respectively.
We are not persuaded that the learned Judge was wrong in his construction of the contract and we are in respectful agreement with his reasoning on this issue.
Moreover, it is apparent from the evidence that Messrs Parsons and Schalit believed that regular reviews would take place of excavate, load and haul rates. That being the case, it is difficult to contend that they increased the plant department rates in the belief that there would be no provision in the contract for adjustment at a later stage by the process of review.
After the contract had been entered into, discussions took place from time to time between Thiess and Placer whereby rates in fact were adjusted. These discussions, in effect, were reviews of rates of the kind contemplated by the contract (albeit that they did not take place strictly in accordance with the times provided thereby). We do not accept that, after the April submission was provided to Placer, any relevant officer of Thiess believed that there was no mechanism under the contract whereby rates would be reviewed so as to reflect the actual costs being incurred.
Conclusions
We have concluded that the learned Judge was entitled to find that:
(a)Thiess accepted the principles embodied in the letter of 12 September 1991.
(b)Mr Morriss' letter of 24 January 1992 was an invitation to Thiess to produce genuine estimates of its mining costs.
(c)When Thiess produced its April submission the parties were negotiating on the basis that Thiess would provide genuine cost estimates.
(d)Placer's knowledge, prior to receipt of the April submission, that the internal plant department rates did not cover all Thiess' plant costs, does not assist Thiess' argument.
(e) Thiess had agreed to omit rates for off-site overheads from the contract and there was good reason to omit rates for excess accident damage therefrom.
(f)Thiess represented to Placer that the plant rates contained in the April submission were its internal plant department rates.
(g)Thiess represented to Placer that the plant rates contained in the April submission were genuine estimates of costs.

The breaches of contract

It is common cause that the plant rates incorporated in the contract were updated versions of those contained in the April submissions, save for some variations that were not material. The incorporation of what in substance were the April submission rates in the contract was brought about by a misrepresentation prior to the contract. The contractual rates were subsequently varied from time to time, but not all the agreements to vary were said by Placer to give rise to claims for damages by it.
The first breach of contract relevant to this appeal concerns representations made by Thiess in September 1993, when it provided rates to Placer, based in substance on the April submissions, for the 1994 contract year. The second breach concerns representations made in September 1994, when Thiess provided rates to Placer, similarly based on the April submissions, for the 1995 contract year. These two breaches are said to arise out of Thiess failing to act in good faith (as required by the contract) in that it knowingly misrepresented that its rates were genuine estimates of its costs.
The learned Judge found further that Thiess had committed two other breaches of contract. First, it had wrongfully inflated the rate provided in January 1993 for the Liebherr 984 excavator and the CAT 773 fleet. Secondly, it had wrongly inflated the rate provided in about March 1993 for CAT 785 trucks. Thiess accepted that the rates for the Liebherr 984 excavator, the CAT 773 fleet and the CAT 785 trucks were established in accordance with the method used in compiling the April submission.
It is common cause that if Thiess' contentions in regard to the April submission fail, the findings that Thiess committed the four breaches of contract in question must stand.

Did the April submission contain misrepresentations as to plant rates

The evidence of Messrs Parsons and Schalit

Thiess determined the rates for plant in the April submission in the following manner. The starting point for those rates was the Thiess plant department rates. Mr Schalit and Mr Parsons then adjusted the major repair and depreciation components of the plant department rates so that the projected revenue from plant was increased by approximately $1.2 million. The learned Judge found that this sum of $1.2 million was an allowance for profit only and was not an estimate of costs.
Mr Schalit and Mr Parsons were the two principal witnesses called by Thiess to explain the adjustments resulting in the increase of projected revenue by $1.2 million. While both were involved in the adjustments, Mr Parsons was the person ultimately responsible, and in charge of the exercise. Thiess contended that the learned Judge erred in failing to accept their evidence that the $1.2 million represented a genuine estimate of costs to be incurred.
Mr Parsons testified that Mr Schalit prepared the April submission, but in the course of the preparation he spoke to Mr Schalit several times and they exchanged information by facsimile. Mr Parsons said that he and Mr Schalit agreed that the depreciation allowed for in the plant department rates should be increased and that there should also be an extra provision for major repairs. Mr Parsons stated further that he brought up the workshop overheads at Belmont and administration costs charged by the plant department. He said that those costs had been overlooked.
According to Mr Parsons, he and Mr Schalit then "settled on figures which did not take all the additional estimated costs into account". Mr Parsons said that there was a "trade‑off" between him and Mr Schalit in which they agreed that only one set of contingencies should be allowed (each initially apparently being of the view that the rates should be increased to give an additional $1.2 million revenue, but each for different reasons). Mr Schalit gave no evidence about such a trade‑off and the learned Judge did not accept that there was a trade‑off.
The plant department had earlier reviewed the depreciation rates at Mr Parsons' request, as he considered that they were too high and wished them to be reduced. The learned Judge did not accept that Mr Parsons later wanted to increase the depreciation rates again. Nevertheless, the depreciation rates, according to Mr Parsons, were increased. His Honour concluded:
"Mr Parsons had some other reason for wishing to adjust depreciation rates."
In cross‑examination, Mr Parsons said that the missing costs related to the overheads of the Belmont workshop and the internal plant department administration (and did not refer to the other items). He said that these costs amounted to about $40,000 per month for 30 months, being a total of $1.2 million. Mr Parsons, by that testimony, abandoned his reliance on the depreciation and major repairs as being the rationale (or part of it) for the increase of the $1.2 million (although the rates that were adjusted were those for depreciation and major repairs).
Mr Schalit's testimony differed from that of Mr Parsons. According to Mr Schalit, the plant department rates were increased because of the need to allow more for major repairs and depreciation. He did not testify that the rates were increased to cater for the overheads of the Belmont workshop and the internal plant department administration. The learned Judge, however, found that Mr Parsons did not accept that an increase was needed to cover major repairs or depreciation (albeit that some major repair items and depreciation were adjusted upwards). The learned Judge observed that the evidence of Mr Schalit, generally, was vague and it is apparent that, although his Honour did not consider Mr Schalit to be a dishonest witness, he considered his evidence to be unsatisfactory. He referred to Mr Schalit's memory as being "generally poor".
According to Mr Schalit, Mr Parsons gave him the information and figures relating to the residual values which led to an increase in depreciation rates. The learned Judge accepted this part of Mr Schalit's testimony and found that he in fact increased the depreciation components of the rates in the April submissions "in accordance with residual values given to him by Mr Parsons".
Mr Schalit described the way in which he and Mr Parsons adjusted the internal plant department rates. He said:
"We distributed the deck through the equipment to maintain a balance so that when [Placer] looked at the plant rates there were no anomalies."
The learned Judge pointed out:
"[Mr Schalit] explained that if all the costs had been appropriated to one item of plant, Placer would have appreciated that there was a loading against that machine. This would have appeared anomalous when Placer was comparing its owner‑mining plant rates with those provided by Thiess."
In other words, Mr Parsons and Mr Schalit distributed the adjustments through the various items of plant and equipment so that Placer would not realise what Thiess was doing. That alone is capable of giving rise to an inference of bad faith.
It was obviously open to Thiess, in the April submission, to specify separately those costs for which no provision was made in the plant department rates (and there was some evidence that that was usual practice). It was also open to Thiess to specify those particular costs for which it thought that inadequate provision had been made in the plant department rates. But that is not how Thiess dealt with the matter. Messrs Parsons and Schalit deliberately set out to disguise from Placer that they were increasing the rates over and above what was contained in the plant department rates simply by distributing increases through the "deck" so that a proportionate balance would be maintained amongst all the costs and Placer would not discover what Thiess had done. In Mr Schalit's own words:
"If we had put [the increases] against one machine, they would have immediately seen that there was a loading against that machine, and what we wanted to do was actually spread it amongst all the plant."
In the result, the learned Judge's findings in regard to the evidence of Messrs Schalit and Parsons were as follows:
"1.The April submission was prepared by Mr Schalit and approved by Mr Parsons, who was ultimately responsible for it.
2.Mr Schalit used the plant department rates as his starting point. He increased the rates by distributing among the major repair components of various rates some largely arbitrary provision for costs not covered by the plant department rates.
3.Mr Schalit increased the depreciation components of those rates in accordance with residual values given to him by Mr Parsons.
4.Mr Parsons did not accept as valid Mr Schalit's increase in the major repair component, but he wanted to achieve an increase in revenue of about $1.2 million for 1992‑94, over the revenue which would have been derived from an application of the rates set by the internal plant department.
5.The increase of $1.2 million was not a genuine estimate of Thiess' costs."
The learned Judge accepted that Mr Schalit had endeavoured to collect historical costs for accidental damage (in an exercise Mr Schalit conducted to determine whether an increase could justifiably be made for this item). His Honour, however, observed that, "it is by no means clear how he did it" and noted that it was accepted by Thiess in closing submissions that, as a whole, the adjustments may have been "somewhat arbitrary". His Honour then went on to say, "In any event, that explains only part of the $1.2 million."
Mr Martin relied on these remarks to submit that his Honour found that part of the $1.2 million is to be explained as being a legitimate provision for accidental damage. Having regard to his Honour's reasons as a whole, however, we do not accept that submission. In our view, his Honour was saying that, even were it to be accepted that a provision for accidental damage by reference to the historical costs collected by Mr Schalit had been made, that would not explain the adjustments made to the depreciation rates and the rates for major repairs. In the end, however, the learned Judge did not find as a fact that any part of the $1.2 million represented a provision for accidental damage.
The learned Judge concluded:
"It is not necessary to decide whether to accept Mr Parsons' evidence that the $1.2 million was then intended to cover the missing overheads before a 5.87% margin was included in the submission to cover off‑site overheads. That is because in due course Mr Parsons, Mr Trio and Mr Jukes all regarded the $1.2 million as profit."
Mr Martin submitted that, by those remarks, the learned Judge indicated that he had made no decision whether to reject Mr Parsons' evidence that the $1.2 million was intended to cover off-site overheads. Again, we do not accept that submission. The finding by his Honour that "the increase of $1.2 million was not a genuine estimate of Thiess' costs" is directly inconsistent with it. It follows therefore that the learned Judge rejected Mr Parsons' testimony that the increases, or any part of them, were genuine estimates of the off-site overheads. In our view, what his Honour had in mind in making the remarks in question was that it was not necessary to decide whether Mr Parsons intended to include the $1.2 million to cover the missing overheads and also to allow a 5.87 per cent margin to be calculated on the $1.2 million (as well as on other costs).
His Honour carefully set out his reasons for concluding that, having regard to the evidence of Mr Schalit and Mr Parsons, the adjustments they made to the plant department rates were not based on a genuine estimate of Thiess' costs. These reasons have not been shown to be subject to error. It follows that the finding that the April submission was not a genuine estimate of Thiess' costs stands. In our opinion, that being the case, it must inevitably follow that the breach of cl B1.1.5 was established. As we have mentioned, the April submission rates were, in substance, incorporated in the contract, and thereafter the rates that were agreed during the review process were also, in substance, based on the April submission. Once it is established that the April submission was not a genuine estimate of Thiess' costs, the inexorable conclusion is that Thiess did not act in good faith in all matters relating to the derivation of rates.
The point to be made at this stage is that his Honour found, by reference to the testimony of Messrs Parsons and Schalit alone, that the April submission was not a genuine estimate of Thiess' costs. That conclusion was based simply on an analysis of the evidence given by Mr Parsons and Mr Schalit and findings as to their credibility and reliability. That finding therefore stands irrespective of other evidence on which the learned Judge relied to support this conclusion.
The other evidence relevant to this issue took up considerable time both at the trial and during the appeal. They concerned two matters, described in the course of argument as the "Keringal contract negotiations" and the "June note". In view of our conclusion that the learned Judge was entitled to find, by reference to the testimony of Messrs Parsons and Schalit alone, that the April submission was not a genuine estimate of costs, it is not strictly necessary to consider these matters. In view, however, of the attention that was given to them by counsel, we shall deal briefly with them.
The Keringal contract
The Keringal deposit is located some 25 kilometres from the Granny Smith mine. In December 1993, Placer awarded the Keringal drilling and mining contracts to Thiess after tenders had been received from it in November 1993. We shall refer to these contracts collectively as "the Keringal contract". The Keringal contract was a schedule‑of‑rates contract.
At a meeting on 6 December 1993, Mr Morriss on behalf of Placer and Mr Parsons on behalf of Thiess discussed Thiess' tender for the Keringal contract. Mr Parsons told Mr Morriss that the tender could not be reduced further because it had been prepared on the same basis as the Granny Smith contract; "that is cost plus 5%". Mr Morriss was thereby led to believe that Thiess was not intending to charge for off-site overheads under the Keringal contract. That is because, as his Honour found, Thiess (to Mr Parsons' knowledge) had expressly excluded off‑site overheads from the Granny Smith contract.
Mr Parsons stated that, at the 6 December 1993 meeting, he had told Mr Morriss that the costs under the Keringal contract included off‑site overheads, but he was disbelieved in this respect by his Honour. Mr Parsons was cross‑examined in this connection about certain notes that he had prepared for the purposes of putting arguments to Placer at the meeting on 6 December 1993. At the time, AWP Contractors Pty Ltd had also tendered for the Keringal contract and was competing against Thiess. Mr Parsons went to the meeting to persuade Placer to award Thiess the Keringal contract and not AWP. A note, under the heading "tender submission", stated:
" – tight, passed on all savings competitive and less than other reputable contract miners."
Another note contained the statements:
"1.Done in accordance with Granny Smith format i.e. Costs + 5% profit on turnover.
2.Utilised plant maintenance personnel already at Granny Smith more efficiently …
3.Utilised existing overheads at Granny Smith and operators also."
As the learned Judge observed:
"[The notes] give the impression that off‑site overheads would not be charged because (as stated in the first note above referred to) the submission was 'tight', all savings having been passed on. And the second note gave the impression that there would be no additional overhead costs in any event."
Mr Parsons accepted that the notes contained arguments he proposed to put to Placer. The learned Judge found that, having regard to the notes, it was unlikely that Mr Parsons told Mr Morriss at the meeting that Thiess was proposing to charge for off-site overheads.
In fact, the tender submitted by Thiess to Placer for the Keringal contract included a margin of 10.5 per cent, being 5 per cent for profit and 5.5 per cent for off‑site overheads.
The learned Judge also had regard to the way in which Thiess constructed the Keringal tender and then later reconstructed it in anticipation of conversions from a schedule‑of‑rates contract to a partnering contract. A later version of the tender, drafted as an exercise in relation to a partnering contract, was prepared on the basis that certain plant rates were increased so as to make up the 5.5 per cent mark‑up for off‑site overheads, and any specific reference to the 5.5 per cent mark‑up (either as a separate item or part of a larger mark‑up) was removed. As his Honour observed, "This was done in such a way that the rates were similar to those being charged under the Granny Smith contract." This version was never used or shown to Placer but was merely an exercise. Mr Parsons, however, sought to justify what Thiess intended to do had the exercise proceeded to reality, saying:
"We had been awarded a contract to get paid a certain amount of money. That tender was our best price and I don't see that there was any reason at that stage … for us to reduce our tender price. I mean, why would we?"
The idea underlying the "partnering" concept of contracting, namely that the contractor would recover a fixed percentage on actual costs (so far as those costs could reasonably be determined), with the risk involved in those costs being shared between contractor and principal, seems to have escaped Mr Parsons.

The learned Judge then went on to assess damages in a different way. His Honour said:
"I think the appropriate course is to calculate, on a global basis, the difference between the revenue actually derived by Thiess and Thiess' costs plus a margin of 5%."
And stated:
"I accept as generally accurate the various reports prepared by Mr Berrey from his analysis of Thiess' ledgers."
Mr Berrey was an accountant called by Placer to give expert accounting testimony .
Mr Berrey attempted to establish what were termed cost overruns and underruns (but in the Thiess plant department only). He compared the total costs of operating the plant with the total revenue received by the plant department (but had no regard to ownership costs, including depreciation, which he was unable to identify). He thereby determined the extent to which, on particular items, actual costs exceeded or were less than the revenue earned for the items in question. He established that, for the period of the contract, the plant operating costs were $19.344 million, whereas plant department revenue was $19.250 million. According to Mr Berrey, therefore, the revenue of the plant department was $94,000 lower than costs, in a total of $19.250 million over the three‑year contract. The learned Judge accepted Mr Berrey's analysis and said:
"I therefore think it appropriate to increase the cost disclosed ... by $0.1 million (and hence reduce the profit by the same amount) in order to take account of the small net overrun."
The learned Judge also noted that in the period July to December 1993 there were productivity increases which resulted in Thiess being entitled to earn profits greater than 5 per cent. The extent of the productivity increases (and the resulting profits to Thiess) was very much in dispute at the trial. The learned Judge rejected the evidence tendered by Thiess in that regard and accepted that of Mr Berrey, tendered by Placer. The consequence was that his Honour found that there were productivity increases of $500,000 for 1993.
The learned Judge then attempted to establish the difference between the revenue actually derived by Thiess for all the work performed by it, on the one hand, and Thiess' overall costs, on the other, so as to determine Thiess' profit.
His Honour referred to Mr Berrey's testimony that the total revenue earned by Thiess from the Granny Smith contract was $72.189 million (all figures being rounded to three decimal places). He said that Thiess' costs for performing all the work under the contract amounted to $62.243 million. Again, this figure was based on the testimony of Mr Berrey. His Honour then pointed out that, by a process of arithmetic (deducting $62.243 million from $72.189 million), "Thiess' profit for the Granny Smith contract was therefore $9.947 million." He proceeded:
"If a 5% margin is applied to Thiess' costs, its profit should have been $3.112 million. Hence, on this basis, the excess profit was $6.835 million."
In other words, the learned Judge deducted $3.112 million (being 5 per cent of $62.243 million) from $9.947 million to arrive at excess profit of $6.835 million.
His Honour noted, however, that Mr Berrey agreed with certain testimony given by Mr Calder, a chartered accountant retained by Thiess and, having regard to Mr Calder's evidence, the learned Judge concluded:
"The result is that the profit under the Granny Smith contract was $8.565 million, which I will reduce to $8.465 million to take account of the small cost overrun."
His Honour went on to decide, in effect, that ‑ since Thiess' profit entitlement was $3.112 million ‑ the excess profit was $5.353 million (being $8.465 million less $3.112 million). His Honour proceeded to deduct the $500,000, being the profit earned by Thiess from productivity increases from the sum of $5.353 million and arrived at a figure for damages of $4.853 million.
It may be convenient at this stage to summarise his Honour's approach:
(1)Thiess' costs in carrying out the contract were established.
(2)The balance between cost overruns and overruns in the internal plant department was determined. The small net overrun was added to the costs (as that net balance resulted in a reduction of profit).
(3)The contractual profit of 5 per cent was then calculated on the costs determined after taking into account the overrun (the figure so arrived at being equivalent to the amount to be paid to a contractor under a cost‑plus contract).
(4)Productivity increases were determined and added to the costs plus the overrun plus the contractual 5 per cent profit.
(5)The figure arrived at in terms of the calculation referred to in par 4 was then deducted from total revenue. The balance was then assumed to be the profit derived by Thiess from the inflated plant rates utilised in breach of the contract.
It is to be emphasised that a crucial element of this method is the assumption that the only sources of profit earned by Thiess were the 5 per cent fixed by the contract, cost underruns and productivity gains.
No argument as to method of assessment would have arisen had Placer proved its damages in the following manner:
(a)Identify each item of plant in respect of which an inflated rate was used.
(b)In respect of each such item of plant, identify the plant department rate applicable thereto.
(c)Carry out an FPC simulation, in accordance with the contract, using the appropriate plant department rates for load and haul so as to establish the notional contractual rates applicable thereto.
(d)Calculate the notional contractual rates for the other items of plant referred to in (a), applying the appropriate plant department rates in accordance with the criteria laid down by the contract itself.
(e)Using the notional contractual rates so established, determine the revenue that would have been earned from the items of plant to which those rates applied.
(f)Determine the revenue in fact earned from the plant to which the inflated rates were applicable.
(g)Deduct the revenue determined in accordance with par (e) from the revenue determined in accordance with par (f).
The formula we have outlined is the basis of calculating damages that ordinarily would be used by a party in the position of Placer. This formula would produce the revenue that Thiess would have earned from the plant in respect of which inflated rates were used, and the resultant amount, when deducted from the revenue that Thiess in fact earned from the plant to which the inflated rates applied, would be Placer's damages. Upon payment of the amount so calculated, Placer would be put in the position it would have been in had Thiess not breached the contract. But Placer made no attempt to prove its damages in this way.
The processing of plant department rates for load and haul by means of the FPC computer simulation so as to arrive at the relevant notional contractual rates is an essential element of the "ordinary" method of assessment that we have suggested. It is essential to carry out an FPC simulation, in accordance with the contract, to establish the notional contractual rates applicable to those items in respect of which the rates were inflated.
The FPC simulation is a highly complex and subtle process, which has regard to manifold factors, and involves many possible permutations. The method utilised by the learned Judge did not involve any FPC simulation (and nor did the approach adopted by Placer). Essential to his Honour's method is the proposition that the balance of cost overruns and underruns plus productivity gains would have the same effect on damages so calculated as the FPC computer simulation would have when using the method we have suggested. Counsel for Thiess challenged this proposition. The issue that arises, accordingly, is whether the making of allowances for cost underruns and overruns (in the plant department) and productivity gains compensates accurately for not undertaking the FPC computer simulation.
Detailed submissions in this regard were made by all counsel. These submissions involved explanations of the FPC computer simulation process and the results it produced. Counsel were compelled, however, to attempt to persuade us of the merits of their submissions largely by reference to their personal understanding of the computer process in question, and not to evidence that bore directly on the relevant issues. That was because, as Mr Ainslie (junior counsel for Placer) accepted, no evidence was led (by either party) to prove that the method adopted by his Honour would indeed compensate accurately for the omission to conduct an FPC computer simulation.
The reason that such evidence was not led gives rise to another important question, namely, how the question of damages was treated at the trial, and we shall come to that issue shortly. The difficulty that presently arises, however, is that the area in dispute involves technical expertise beyond any judicial notice. Additionally, the Court is not confident that it understands fully and properly the implications and workings of the FPC simulation, and precisely how the determination of cost underruns and overruns and productivity gains might produce results having an equivalence to the ordinary method utilising the computer process. These are not questions that should be dealt with by submissions from the Bar table alone. We have come to the conclusion that without appropriate and persuasive evidence dealing with these matters, a reliable judgment cannot be made on the issues in question. That being so, we are of the view that, in the absence of such evidence, his Honour erred, with respect, in adopting the method that he did.
We turn now to the question whether, even assuming that the method used by the learned Judge was permissible in principle, it took into account all relevant sources of profit. We have drawn attention to the fact that the reliability of his Honour's approach is entirely dependent on there being only three sources from which Thiess could earn profits under the contract, these being the agreed 5 per cent allocation, cost underruns and productivity gains in respect of the matters taken into account by his Honour.
In regard to this issue, it is necessary to reiterate that the Granny Smith contract was not a cost‑plus contract. Although the contract contained mechanisms designed to ensure that rates were established from time to time by reference to the actual costs then obtaining, there would be periods throughout the contract when the actual costs would be less or more than the estimated costs. The estimated costs would be altered only after the reviews provided for by the contract. In the period between a particular agreement as to rates and the review thereof, it was open to Thiess to make profits over and above the agreed 5 per cent by productivity increases and savings in efficiency. By such means, the actual costs could be reduced to less than the genuinely estimated costs for at least the period until the next review.
It was pointed out on Thiess' behalf that, although it was open to Thiess to make efficiency and productivity gains in virtually every area of the contract, the allowance of $100,000 for cost overruns and the allowance of $500,000 for productivity made by his Honour were in respect of load and haul work only. Load and haul was an important but not major part of the contract. The revenue derived from load and haul was approximately $25 million out of a total contract sum of about $72 million, that is, about 35 per cent. This emphasises the significance of whether there were any other areas in the contract which could have allowed Thiess to make profits over and above those taken into account by the learned Judge.
Thiess contended at the trial that it had made productivity gains in the drill and blast section of its work. Those productivity gains were sought to be calculated by reference to increased drill and blast profitability. But the learned Judge found that other factors in addition to drill and blast productivity contributed to drill and blast profitability, and no evidence was led about those factors. That meant that his Honour was unable to assess productivity gains in the drill and blast category of work and, therefore, made no productivity allowance in respect thereof. The reason that no such evidence was led again relates to how the issue of damages was treated at the trial, an issue that we shall address in due course. Plainly, however, irrespective of that issue, there was potential for productivity gains in the drill and blast area. Additionally, productivity gains allowed for by the learned Judge concerned only the period July to December 1993. It was not alleged that Thiess committed any breach of contract in 1992, and it was open to it to have made productivity savings in that year. This does not appear to have been considered. The learned Judge made no express finding as regards productivity gains for the remaining periods of the contract.
Moreover, profits could have been derived from efficiencies (other than productivity) in areas such as site costs. No findings were made in regard to whether such efficiencies had been achieved. The fact is that this was not a live issue at the trial.
Mr Ainslie submitted that on the evidence Thiess made no productivity gains other than those specifically found by the learned Judge. The merits of this submission, however, depends on credibility issues not resolved by his Honour, and this Court is in no position to make factual findings of the kind that would be necessary. In any event, the evidence in question concerns productivity gains alone, and not savings from efficiencies.
In the circumstances, we are of the opinion that the method adopted by his Honour did not adequately take into account the potential for efficiencies and other productivity gains in areas of the contract not considered by him. In other words, there may have been sources of profit other than the agreed 5 per cent, cost underruns and productivity gains. Once Thiess could have earned profits under the contract from different sources, the method adopted was not a reliable means of assessing damages. Due consideration needed to be given to the other sources so as to ensure that proper allowance was made for profits derived from them. This was not done.
It is to be emphasised, however, that the learned Judge did not conclude, by reference to the evidence, that the method he adopted catered for all sources of profit. In explaining why he used the method in question, the learned Judge said:
"It is not suggested by Thiess that its increased profitability resulted from anything other that [sic ‑ than] the differential rates and improved productivity."
In other words, his Honour was of the opinion that Thiess impliedly accepted that the profits made by it did not result from anything other than the inflated rates and improved productivity (to the extent alleged by it). The validity of his Honour's overall approach rests on this view. Mr Ainslie submitted that the learned Judge was justified in this conclusion as Thiess conducted its case on this basis. We accept that, were this submission to be upheld, the existence of other sources of profit would be immaterial.
Significantly, the learned Judge's method of assessment was not pleaded by Placer as the basis of its claim for damages, it was not advanced by Thiess in any way as being applicable to Placer's claim, no witness suggested that it should be utilised in regard to Placer's claim, and it was not propounded by either Thiess or Placer in the course of closing addresses.
It was submitted on Thiess' behalf that, having regard to the pleadings and the way in which the trial was conducted, it was unfairly prejudiced by the learned Judge's approach to damages. It was submitted on behalf of Placer, on the other hand, that the issues involving the amounts of cost overruns and underruns and productivity gains were very much alive at the trial and were canvassed in depth. Accordingly, it was submitted that his Honour, in determining Placer's damages, was entitled to rely on the findings that he made in regard to those issues. It is necessary to examine those contentions in some detail.
At the trial Thiess, as plaintiff, claimed damages for wrongful termination of the contract based on the proposition that it would have earned profits of more than 5 per cent. Thiess sought to prove that its profits were increased beyond 5 per cent by reason of productivity gains. In that regard par 20(a) of Thiess' statement of claim pleaded:
"(a)By reason of progressive increases in productivity due to the application of new technology, increased efficiency and the fixing of [Thiess'] information provided to [Placer] in 1993 and 1994 for 1994 and 1995 respectively in advance, [Thiess] achieved a profit margin in the order of 7.5 per centum per annum on its costs of its operations at the GS mine between January, 1994 and June, 1995.
(b)Had [Placer] not cancelled the GSM contract, [Thiess] would have earned profits in the order of 7.58 per centum per annum on turnover its costs [sic] during the life of the GS mine."
These allegations were the foundation for Thiess' claim for damages based on productivity increases. They were not directed at issues that arose in connection with Placer's counterclaim. In particular they were not Thiess' pleaded answer to the claim that all its profits that exceeded the agreed 5 per cent were the result of inflating the plant department rates.
Productivity was also raised in the pleadings relating to Placer's counterclaim. Paragraph 32 of Thiess' reply and defence to counterclaim pleaded:
"[Thiess] admits that its representatives did not state in terms that it was deriving profits exceeding 5% on its costs, but says:
(a)At all material times [Thiess] submitted daily mining reports and blasting reports to [Placer] which set out the actual production and productivities achieved by the excavators and drills on site. In 1993, the actual productivity [sic] achieved were significantly higher than the estimated productivities used to derive the base rates for loading and hauling and drilling and blasting. This implied that [Thiess] was earning more than 5% on its costs and [Placer] monitored [Thiess'] rates of productivity at all material times;
(b)that it disclosed whatever records and information [Placer] required when base rates or one or more of them were reviewed …
(c)that [Placer] did not enquire what [Thiess'] profits on its costs had been
(d)changes in plant, volumes of material and improved productivity during 1993 resulted in fluctuations in the percentage profits derived by [Thiess]."
By these allegations Thiess was using productivity improvements as part of its answer to Placer's allegation that it failed to disclose that it was earning profits that exceeded 5 per cent of its costs. Thiess' argument on this issue was that, at all material times, Placer monitored Thiess' rates of productivity and knew, or should have known, that in consequence thereof Thiess was earning profits greater than 5 per cent. Productivity was not raised by Thiess in connection with Placer's counterclaim in any sense as being relevant to the assessment of Placer's claim for damages.
We have set out above how Placer pleaded its claim for damages and have in particular referred to par 96(a) and par 96(b) of the counterclaim. It is apparent from those paragraphs that Placer did not assert that productivity was in any way relevant to its claim for damages. Its claim as pleaded was based entirely on the use of the Project Forecasts from which Placer sought to derive the percentage profit earned by Thiess as disclosed thereby.
At the trial, productivity was mentioned in the opening addresses. Senior counsel for Thiess, in seeking to explain why the claim for damages was in the order of 7.5 per cent on turnover, rather than the profit of 5 per cent as agreed under the contract, submitted that the reason for the additional profit was improvement in productivity and not hidden profit in the rates. He said:
"There were benefits to [Thiess] from having a contract which contemplated improvements in efficiency, the use of better equipment, which had to be agreed on, of course, in advance, and better productivity and better rates."
Mr Clifford told the learned Judge in opening that it was not in dispute that Thiess earned more than 5 per cent profit on turnover. He said:
"The real matter in dispute, as I apprehend the experts' reports and the witnesses, is where the 5 per cent was earned, how it was earned or on what it was earned, and the real issue there is whether we earned the more than 5 per cent on our case on improved productivity. As [senior counsel] has said, we say that beating the 5 per cent on cost was done because we continually improved our productivity by the means outlined: updating equipment and so on."
At a later point, Mr Clifford said:
"We have also earned [profits] on productivity because the material we encountered could mine more easily than had been anticipated."
And:
"The contest is that [Placer's] case seems to be that we earned this profit above 5 per cent on cost because we disingenuously inflated the cost of our plant, which was one figure that went into the computer program used to generate a BCM rate."
And:
"[Senior counsel] has addressed you for 2 days on all of the material that we say go [sic – goes] to productivity issues and no doubt Mr Gilmour will deal with the inflated cost issues."

In the context in which those remarks were made, it is plain that counsel for Thiess were dealing with productivity only as an element which justified Thiess' claim for damages exceeding 5 per cent. They did not intend to submit that, as regards Placer's counterclaim, Thiess' profits could be established by determining productivity improvements and using the result in the way adopted by the learned Judge. That was not an issue that had been raised in any way at the time the remarks in question were made.
It is one thing for Thiess to attempt to justify an increased claim for damages on the basis of increased productivity. In this context, a tactical decision might be made to rely only on productivity (of a particular kind and in relation to particular aspects of the work) as an explanation and ground for increased damages. It is another thing entirely to say that Thiess admits that, in calculating Placer's damages, Thiess' increased profitability is to be ascribed either to increased productivity (to the extent claimed by it) or to the use of inflated rates, and to nothing else. If Thiess had known that Placer was seeking to have its damages determined by reference to cost underruns and overruns and productivity, Thiess, by way of defence, might have raised issues very different to those that formed part of its own claim for damages. Moreover, the issues concerning Thiess' claim and Placer's counterclaim relate to different periods in time. Thiess' claim concerns the profits it would have made had the contract not been terminated. Placer's counterclaim concerns the moneys overpaid by it prior to termination. The factors bearing on each may differ, and this was not investigated.
In our opinion, nothing in the passages set out above justifies an inference that, in regard to Placer's claim for damages, Thiess intended to admit that its increased profitability did not result from "anything other tha[n] the differential rates and improved productivity." The learned Judge was correct in stating that Thiess did not suggest that its increased profitability resulted from anything other than the inflated rates and improved productivity. But that was because Thiess was never called upon to say anything about the question in regard to Placer's counterclaim. The question simply did not arise. In our opinion, his Honour erred, with respect, in finding, in effect, that Thiess had admitted that its increased profitability arose either from the inflated rates or improved productivity (to the extent claimed by it). The trial of Placer's counterclaim was not conducted on this basis.
We have observed that the method adopted by the learned Judge involved regarding the contract, in principle, substantially as a cost‑plus contract. That is, in the sense that the only profit Thiess was entitled thereby to earn (apart from profits derived from limited productivity gains) was the agreed 5 per cent on actual costs (the allowance for cost overruns being designed to arrive at actual costs). Gains from other efficiencies or improvements were not taken into account.
In this context, Mr Clifford drew attention to the fact that, until some weeks prior to the trial, Placer's counterclaim was based on the proposition that Thiess was to carry out the mining work at its actual rates, but the pleading was then amended to assert that the work would be carried out at agreed rates. Thereafter, Placer did not assert a cost‑plus basis for its claim. According to Mr Clifford, Thiess therefore did not expect and was not ready to meet a claim in those terms.
At the trial, in the closing addresses, Placer continued to assert that it relied for its proof of damages on the actual estimates made by Thiess in its Project Forecasts. Counsel for Placer submitted that "support for the accuracy of these figures comes from the [Project Forecasts] and the profits that Thiess actually made". This was in accord with Placer's statement of claim, which based the calculation of damages solely on the Project Forecasts. In an exchange between the learned Judge and Mr Ainslie, the following was said:
"TEMPLEMAN J: I suppose you could approach this from the point of view of actual costs, couldn't you? Mr Berrey's analysis of Thiess's actual costs could be used as a basis and then a profit margin of 5 per cent added.
AINSLIE, MR: That is the way we first approached it and I think we were wrong, with respect, but I think what you can do is you can use
TEMPLEMAN J: Why is that wrong?
AINSLIE, MR: Let's say, for example, that on 1 January 93 Mr Kenny provided his plant department rates and at that stage he estimates the cost of the 777s at $100 an hour each. Those rates started to apply. In February the deal with Bain and Co was completed and because of that, the depreciation of the 777s which Mr Kenny estimated to be at $20 an hour were in fact only $10 an hour because they bought it a lot cheaper.
TEMPLEMAN J: Yes.
AINSLIE, MR: We couldn't do anything about that until the next review. Therefore, if between February and end of March Thiess earned not 5 per cent but 5.1 per cent because of the estimate in relation to the 777s not being accurate, that is their entitlement. So we don't argue about the fact that it is possible for Thiess to earn less or more than 5 per cent. What the contract is designed is to correct that change fairly quickly, so in effect it will be 5 per cent throughout the contract because you are only talking about very small periods of time.
TEMPLEMAN J: Yes.
AINSLIE, MR: So that example is probably why we say that position is not proper, but we do say that it is a very useful guide to show that our actual method is the correct one … So it all gives comfort as to we have got it right, but I don't think it can replace it.
TEMPLEMAN J: But?
AINSLIE, MR: I said, it gives us comfort that we have got it right, but I don't think it can actually replace it.
TEMPLEMAN J: Can't replace it?
AINSLIE, MR: Not replace the way we have calculated it.
TEMPLEMAN J: I see, yes."
The fact is that although Mr Ainslie told the learned Judge that it was wrong to approach damages from the point of view that Mr Berrey's analysis of Thiess' actual costs could be used as a basis and then a profit margin of 5 per cent added, the learned Judge, at least to a degree, adopted that method. His Honour sought to remedy the defects in that basic approach by also taking into account cost overruns and underruns and productivity. The problem is that he did so of his own volition, without the benefit of any submissions from either party and without the method being raised previously at trial. Understandably, having found that Thiess had committed serious breaches of contract, but having rejected the basis of Placer's damages' calculation, the learned Judge sought to determine damages on some different basis. However, as no submissions had been made in this connection, his Honour had to pursue the exercise on his own ‑ an undertaking fraught with difficulties.
According to Mr Clifford, Thiess did not cross‑examine Mr Berrey about whether productivity allowances could reliably establish the damages suffered by Placer, as that was never said to be Placer's case. Moreover, cross‑examination of Mr Berrey stopped after Mr Berrey had conceded that the Project Forecasts were not reliable. Mr Clifford said that, having regard to the pleadings and the way in which the trial had been conducted, there was no point in cross‑examining Mr Berrey any further. The whole basis of Placer's claim for damages as pleaded had been destroyed (as the learned Judge in fact found).
Both counsel for Thiess submitted that the learned Judge's approach in regard to the calculation of Placer's damages was prejudicial to Thiess, as Thiess did not know and could not have known that the particular elements of the learned Judge's formula were to be relevant factors in the determination of Placer's damages. In particular, it was said, Thiess did not appreciate that profit earned by it otherwise than from the agreed 5 per cent, cost underruns and overruns, and productivity issues raised by it when presenting its claim, would become material. They submitted that Thiess, therefore, had not had the opportunity of testing the relevant witnesses called by Placer in regard to matters of this kind, nor had Thiess been given the opportunity of leading any evidence‑in‑chief on the issues in question. In our opinion, those submissions have to be upheld.
In all the circumstances, we consider that the learned Judge erred, with respect, in his findings as to damages. The situation is somewhat analogous to Monaco v Arnedo Pty Ltd, unreported; FCt SCt of WA; Library No 940481; 6 September 1994. In that case, a Commissioner of this Court "had determined to decide the case upon a construction … which was fundamentally different in concept to the constructions being advanced by the parties, and on which they had based their evidence, cross‑examination and conduct of the case generally." It was there held that it would be dangerous in the circumstances to allow the judgment to stand. In effect, as the trial had been resolved in a way so materially different from that advanced by the parties, the court considered that the judgment in favour of the respondent should be set aside and a retrial ordered.
The issue arises similarly whether in this case a retrial should be ordered in respect of damages.
In a material respect this case differs from Monaco v Arnedo Pty Ltd. In the latter case, the learned Commissioner resolved the dispute solely by an approach that differed from the way in which the parties had conducted the trial. In the present case, the learned Judge carefully considered the way in which Placer sought to claim damages and found that the Project Forecasts were unreliable. It followed from that finding that the basis on which Placer sought to establish its claim at the trial failed. This conclusion by his Honour was strictly in accordance with the pleadings and the arguments advanced by both parties. There is no complaint by Placer as to this conclusion. In this appeal Placer seeks merely to support the alternative approach that the learned Judge adopted to its damages claim. We have held that that approach was erroneous. It follows, prima facie, that the finding that Placer failed to prove that it suffered damages must stand.
That prima facie conclusion would be rebutted if the trial miscarried by an error of law by the learned Judge, or the way in which the trial was conducted resulted in injustice: Transport & General Insurance Company Limited v Edmondson (1961) 106 CLR 23 at 31, Balenzuela v De Gail (1959) 101 CLR 226 at 242 ‑ 3. No suggestion was made in the course of argument that his Honour made any error of this kind or that the trial miscarried in any way. In this regard we point out that during the course of argument on appeal the Court raised the question whether a retrial of the damages issue would be appropriate should Thiess' submissions as to damages be upheld. Mr Martin submitted in response that Placer had failed to prove its damages and therefore its counterclaim should be dismissed, but nothing in this regard was said on Placer's behalf.
Despite the absence of submissions, in the light of the grave consequences that follow for Placer should we conclude that there should be no retrial (in the context of a finding that, after a long and complex trial, Thiess committed breaches of its contractual obligations of good faith), we have given anxious consideration to whether there is any ground on which a retrial as to damages could be ordered. Having regard to the matters to which we have already referred, it seems to us that the only basis on which a retrial might properly be ordered is if Placer's damages could be determined by the evidence led at the trial in a way consistent with the case conducted by Placer, and if it could be said that the learned Judge omitted to deal with damages in that way. Were that to be so, it might be said that the omission to so deal with the damages gave rise to an injustice. There are, however, insurmountable obstacles to such an approach.
We again point out that Placer's pleaded case as to damages rested on the Project Forecasts, and this was the basis of its case at trial. The learned Judge considered that the Project Forecasts were unreliable, largely because they incorporated "unreleased profits" not relating to the contract. It has occurred to us that there may be evidence from which the maximum amount of unrelated profits and the minimum amount of profits from the Granny Smith contract could be determined. That would enable a damages figure to be assessed substantially in accordance with the way in which Placer conducted its damages case at trial. This possible method does not appear to have been addressed at the trial, and we received no submissions in regard thereto. The evidence as to damages was very lengthy, detailed, technical and complex. In the circumstances, we are not able in fact to decide whether evidence of the kind postulated exists.
Moreover, as we have mentioned, the learned Judge was not asked to deal with Placer's damages in any way other than that pleaded in the statement of claim and on appeal, no attempt was made to justify a damages award on a basis different to that adopted by his Honour. Therefore, we consider that there is no ground whatever for a possible argument that the learned Judge erred in not considering damages in the way we have hypothesised (or indeed on any other basis).
Finally, there is another factor that, on its own, precludes the ordering of a retrial of the damages issue.
We have set out what seems to us to have been the ordinary way of proving damages, but Placer did not attempt to follow this route. We reiterate that, at trial, Placer sought to rely on Thiess' profit as revealed by the Project Forecasts, and then to deduct the profit so determined from revenue so as to calculate the costs. A 5 per cent profit margin was then added to the costs so calculated so as to ascertain the profit that, according to Placer, Thiess was entitled to earn. According to Placer, the difference between the profit revealed by the Project Forecasts and the profit that Thiess was entitled to earn (as calculated as aforesaid) established the damages it sustained.
In our opinion, there is a fatal fallacy that underlies this approach. Like the method adopted by the learned Judge, it rests on the proposition that the only source of profit to Thiess was the contractual 5 per cent (and, presumably, cost underruns and productivity gains). We have held that there were, however, several other sources of profit. It may be that, utilising the Project Forecasts in the way we have postulated, it would be possible to determine the costs incurred and revenue received from each category of work under the contract. But, in order properly to calculate damages in accordance with Placer's method, the profits earned from all sources would have to be determined. The burden was on Placer to prove such profits. It made no attempt to discharge that burden. We have pointed to the fact that the absence of evidence in regard to profitability factors meant that the learned Judge was unable to calculate productivity gains on load and haul. There was no evidence of cost overruns and underruns in areas other than the internal plant department. As we have mentioned, the productivity gains in the plant department that were assessed were for a limited period of time only. There were other sources of potential profit in respect of which there was no issue at the trial. Placer did not attempt to prove the amounts of profit, if any, Thiess made from all relevant sources. That being so, the way Placer, at trial, attempted to prove its damages was bound to fail. There was a crucial lacuna in its damages formula. In the result, Placer did not prove its damages.
In our opinion, the consequence is that Placer is entitled only to nominal damages which we fix at $100.
We would therefore uphold the appeal, set aside his Honour's judgment and order Thiess to pay Placer nominal damages of $100.