A J Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2009] VSCA 310

What the court decided

McConnell Dowell Constructors (Aust) Pty Ltd (McDow) held a head contract with BHP Billiton Petroleum Pty Ltd (BHP Billiton) for the design and construction of facilities at the Minerva Gas Field near Port Campbell [1]. Under a sub-contract dated 26 June 2002 but not executed until 28 November 2002, A J Lucas Drilling Pty Ltd (Lucas) was to design and construct a shore crossing, which required two drilled bore holes of about 1500 metres from the shore to the sea bed [6]. Lucas was to receive $5 million by progress payments on reaching specified milestones [11]. On 16 September 2003, before the casings had been inserted, BHP Billiton terminated McDow's employment under the head contract, and Lucas' employment ended under clause 24.3 of the sub-contract [13]. McDow did not allege that any breach or default by Lucas caused the termination [13]. It appears that McDow had dropped an earlier allegation of default in return for Lucas confining its claims to clause 24.4 [60].

Lucas had received nothing, because no milestone had been reached [15]. Where, as here, the head contract was determined without default by the sub-contractor, clause 24.4 required Lucas to be paid the value of the sub-contract works completed, and of work begun but not completed, at the date of determination, each value "to be calculated according to clause 14", with loss of profit, if any, on the remaining work [17], [60]. Clause 14 was headed "variations", and its opening sub-clauses defined and regulated them [64]. Clause 14.5 valued them by a schedule for pricing variations or, if there was none, by rules built on a schedule of rates or bills of quantities, with a fair valuation by agreement where those prices could not reasonably be applied [18]. Where McDow considered that extra work could not properly be measured and valued, clause 14.5(d) allowed daywork rates or prime cost plus the percentage stated in the Schedule [18]. The sub-contract had no pricing schedules or bills [39].

Byrne J heard separate trials on liability, on quantum and on loss of profits and costs [19]. He held that clause 14 did not apply [35]. He valued the original scope work as a pro rata share of the $5 million lump sum reflecting the percentage of that work completed, and adjusted for variations valued at cost plus a margin [2]. The award totalled $3,672,925 plus GST, with interest under section 58 of the Act from 23 September 2003 [2]. He fixed the margin on the variation at seven per cent for materials and five per cent for services [35].

Lucas appealed, contending that clause 24.4 called for something akin to a quantum meruit for all the work it had properly performed [47]. It put that value at $10,551,938 [3]. McDow cross-appealed against the award of interest under section 58 [5]. The Court of Appeal (Redlich and Dodds-Streeton JJA and Beach AJA, in joint reasons) dismissed the appeal and allowed the cross-appeal [189].

On the construction issue, the Court considered, contrary to the trial judge, that clause 14.5 could in principle apply even though the sub-contract had no pricing schedules or bills [53], [74]. Its procedures could extend to all of the work valued under clause 24.4(a) and (b), not only to variations [67]. Without schedules, however, it required a fair valuation by agreement, and no agreement was suggested [74]. The trial judge's contrary view therefore did not affect his conclusion that clause 14.5 did not apply [75].

The Court did not find Lucas' construction of clause 24.4 persuasive [53]. Clauses 24.4(a) and (b) did not, expressly or implicitly, prohibit a valuation limited by reference to the sub-contract sum [80]. The contrast with clause 24.2, which applied after a determination for the sub-contractor's default and referred to the total amount payable on due completion, carried little weight [56], [83]. Clause 24.2 provided for a mutual taking of accounts, while clause 24.4 assessed only what was due to a sub-contractor with no counterbalancing liability [83]. Whether a quantum meruit would yield more or less than a contractual valuation depended on the sub-contract sum the parties had agreed [84]. The Court described clause 24.4 as "fault neutral" and saw no good reason for a valuation under it to reward or compensate either party by ignoring their bargain [85].

Other parts of clause 24.4, including the entitlement to loss of profit on the remaining works, assumed that the contractual framework remained relevant [86]. As no single basis of valuation was prescribed and the conventional method was not precluded, the trial judge was entitled to use it [87].

Lucas argued that, because it had spent the whole risk allowance in its price, its pro rata share should include all of it [100]. The Court held that this contention could not be sustained [100]. The trial judge had been satisfied that considerable risk remained in the uncompleted works, and Lucas was entitled only to the share of the agreed price reflected in its degree of completion [101], [102].

The trial judge treated the change to a 12 inch casing and the abandonment of the drill and leave method as variations for which Lucas could recover extra cost, but found that the contractual risks Lucas had accepted did not fall away [104]. The Court held that Lucas' complaint that the trial judge had treated its silence as acceptance of the extra risk misunderstood his reasons [107], [108], [110]. Of seven items claimed for the variation, totalling $1,886,380, the trial judge allowed two, totalling $82,625 [114]. The Court found no error: Lucas bore the burden of showing a causal link between the variation and each disputed cost, and the trial judge was entitled to approach its claims with caution [123].

The trial judge rejected Lucas' tender margin of 40.6 per cent, which included a risk component, because the varied work had been completed [131]. Byrne J adopted as a guide the margins of seven per cent and five per cent in item 10 of the Schedule, to which clause 14.5(d)(ii) referred [133]. The Court concluded that, as all the extra costs of the variation were known and were to be paid, the trial judge was entitled to treat a risk margin as inappropriate [140]. It held that clause 14.5(d)(ii), though not invoked, was a "useful touchstone" to which the trial judge was entitled to have regard, absent more specific contractual guidance [142].

Two of Lucas' delay claims had been abandoned, but the third, for the period from 12 August 2003 to 29 August 2003, had not [149]. The trial judge had noted that BHP Billiton directed a suspension of work in that period, and the Court held that he correctly disallowed the claim [152]. The Court said that delay caused by a shutdown at a third party's direction would not ordinarily be work completed, or begun and executed, under clause 24.4 [152]. Lucas could not recover loss of profit on offshore diving and marine work that it had said in February 2003 it would not perform [154]. The Court considered the trial judge's award of $25,000 for loss of profit on the remaining work, a little over 7.9 per cent of its cost of $314,956, a reasonable assessment [165].

On the cross-appeal, section 58 required the Court, on application and unless good cause was shown to the contrary, to allow interest on a debt or sum certain recovered, at a rate not exceeding the penalty interest rate [167]. Where the sum was not payable at a certain time under a written instrument, interest ran from when demand of payment was made [167]. Extending Kirby J's reasoning on section 60 in Victorian WorkCover Authority v Esso Australia Ltd, the Court held that section 58, having the same beneficial purpose, should not be read narrowly [170], [171]. The Court took from English decisions on the 1833 Act, the predecessor provision, that a demand need not take any particular form or state the exact sum, provided it contains a distinct demand of payment [178], [179]. What amounts to a demand may vary with the circumstances [180].

The Court held that Lucas' letter of 23 September 2003 was not a demand [184]. The only words in it arguably capable of being a demand were in a paragraph that stated McDow's obligation under clause 24.4 to pay Lucas, said McDow was to provide indicative values for discussion and promised Lucas' own claims for discussion [169], [181]. Read in context, the letter noted matters about the termination, promised information and sought to open a discussion, and its reference to the obligation to pay only explained the claims foreshadowed for discussion [184].

Section 58 therefore did not apply, and the Court found it unnecessary to decide whether Lucas had recovered a sum certain or a debt [185]. McDow's contention that interest should have been ordered under section 60 was correct [187]. Section 60 provided, unless good cause was shown, for interest from the commencement of the proceeding to judgment [187]. The proceeding began on 5 February 2007, and McDow had made no good cause submission for the later period [188]. The Court therefore saw no reason to alter the award other than by deleting all interest allowed before that date, and said it would hear the parties on the precise calculation and form of order [188].

Why it matters

Under clause 24.4, which the Court described as "fault neutral", the sub-contractor's lack of fault did not of itself justify a valuation disregarding the contract price. On this sub-contract, a direction to value work "according to clause 14", with no pricing schedule and no agreed valuation, did not prevent the trial judge from starting from the lump sum and adjusting for variations.

A letter that refers to a contractual obligation to pay but seeks a discussion of claims may not be a demand of payment under section 58, leaving interest under section 60 from the start of the proceeding. Each point turns on the words of the clause or letter in question.

The decision applied the Act in the form the Court set out, so readers should check the current text of the Act before relying on the decision.

Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.