FEDERAL COURT OF AUSTRALIA

BAE Systems Australia Ltd v Cubic Defence New Zealand Ltd [2011] FCA 1434

THE COURT ORDERS THAT:

1.    The separate question:

Does the letter dated 31 October 2011 enclosing the Termination Directions and Schedule from the Respondent to the Applicant amount to a valid termination of the Contract for the Provision of Supplies and Support Services to the LAND 134 Program (Contract Number: SC-BAE_AU_CTC-LIS) entered into on 9 June 2003 between the Applicant and the Respondent (Subcontract) pursuant to clause 12.3.1 of the Subcontract?

be answered, yes.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION

1    On 21 November 2011 the applicant issued a proceeding in this Court against the respondent in which it claimed a declaration that the respondent’s purported termination for convenience of a contract for the provision of supplies and supports to Land 134 Program (Contract Number SC-BAE_AU_CTC-LIS) between the applicant and the respondent entered into on 9 June 2003 in purported reliance on clause 12.3.1 of the contract was unlawful and invalid, a declaration that the purported termination constituted a breach of the contract by the respondent and a declaration that the purported termination constituted a repudiation of the contract by the respondent. The applicant also claimed a declaration that the respondent had engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 18 of the Australian Consumer Law (Schedule 2 to Competition and Consumer Act 2010 (Cth)) and/or engaged in unconscionable dealings. Finally, the applicant claimed an injunction preventing the respondent from taking any steps consequent upon its purported notice of termination dated 31 October 2011 until such time as its application had been determined.

2    On 18 November 2011 the respondent (as plaintiff) brought an action against the applicant (as defendant) in the Supreme Court of New South Wales claiming various declarations and orders, including a declaration that the letter dated 31 October 2011 enclosing the Termination Directions and Schedule was a valid termination notice pursuant to clause 12.3.1 of the contract between the plaintiff and the defendant dated 9 June 2003. I will refer to this action as the New South Wales proceeding.

3    The respondent to this proceeding raised a question as to whether the proceeding engaged federal jurisdiction. I held that it did. It did not seem to me that the claim under the Australian Consumer Law was colourable, that is, artificially brought forward or contrived for the purpose of attracting federal jurisdiction.

4    The parties then agreed a number of proposed orders which were designed to ensure the early determination of what they considered to be the pressing issue in dispute between them. A separate question was identified by the parties and I made an order that it be heard separately from the other questions in the proceeding (Federal Court Rules r 30.01). By consent the New South Wales proceedings were transferred to this Court pursuant to s 5 of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (NSW).

5    The separate question is as follows:

Does the letter dated 31 October 2011 enclosing the Termination Directions and Schedule from the Respondent to the Applicant amount to a valid termination of the Contract for the Provision of Supplies and Support Services to the LAND 134 Program (Contract Number: SC-BAE_AU_CTC-LIS) entered into on 9 June 2003 between the Applicant and the Respondent (Subcontract) pursuant to clause 12.3.1 of the Subcontract?

6    The parties have agreed that certain orders will follow depending upon the answer to the separate question. It is agreed that if the answer to the question is yes, then the respondent is entitled to a declaration that the Subcontract has been validly terminated; an order that the applicant specifically perform the obligations set out in the Termination Directions and Schedule; an order that the Applicant, by itself, its employees or agents be restrained from undertaking work under the Subcontract, save for performance of the obligations set out in the Termination Directions and Schedule; and an order that from 23 December 2011 the Applicant by itself, its employees or agents be restrained from entering the Commonwealth land the subject of the Subcontract for the purpose of the Subcontract. It is agreed that if the answer to the question is no, then the Applicant is entitled to a declaration that the Respondent’s purported termination for convenience of the Subcontract in purported reliance on clause 12.3.1 of the Contract is unlawful and invalid and a declaration that the respondent’s purported termination of the Contract for convenience in purported reliance on clause 12.3.1 of the Contract constitutes a breach of the Contract by the respondent.

The Facts

7    Both the applicant and the respondent are corporations which carry on business in Australia as defence contractors. On 9 June 2003 the applicant and the respondent entered into a ‘Contract for the Provision of Supplies and Support Services to the LAND 134 Program’ (Contract Number SC-BAE_AU_CTC-LIS). This contract is referred to in the separate question as the Subcontract and I will refer to it in that way.

8    The recitals to the Subcontract are in the following terms:

A.    The Commonwealth of Australia represented by the Department of Defence ABN 68706814312 (the ‘Commonwealth’) has a requirement for the supply, operation, management support and maintenance of the core, live-simulation, range instrumentation and information systems for the Combat Training Centre – Live Simulation, Range Instrumentation and Information System (CTC-LIS).

B.    The Prime Contractor, has been selected by the Commonwealth and has entered into a contract to provide the CTC-LIS.

C.    The Subcontractor has offered to provide the Supplies and Services to the Prime Contractor on the terms set out in the Contract.

D.    The Prime Contractor has agreed to accept the offer by the Subcontractor on the terms set out in the Contract.

9    The Subcontract commenced on the effective date of 31 January 2003. The Subcontract provided for two phases, an acquisition phase and an operate and support/manage (‘O and S/M’) phase. The acquisition phase of the Subcontract is complete. The O and S/M phase of the Subcontract commenced on the system acceptance date in December 2006 and continues for an initial period of seven years thereafter unless terminated earlier in accordance with the Subcontract.

10    Since the commencement of the Subcontract it has been amended on various occasions pursuant to agreed Contract Change Proposals (‘CCP’).

11    Clause 10 of the Subcontract is in the following terms:

10    CONTRACT MANAGEMENT

10.1    Change to the Contract

10.1.1    The Contract may be varied only in accordance with clause 10.1. The parties shall not be liable to each other for any additional work undertaken or expenditure incurred unless the variation has been approved in accordance with clause 10.1

10.1.2    Either party may propose a change to the Contract in the format set out in Attachment K, Annex A, and where the proposal is a change to the SOW (A) or the SOW (O&S/M), be accompanied by an engineering change proposal in the format set out at Attachment K, Annex B. Contract change proposal pricing shall be based on the schedule of rates set out in Attachment B, Annex F. The subcontractor shall submit proposals that are competitive.

10.1.3    Where the Prime Contractor proposes a change to the Contract it shall:

a.    notify the Subcontractor and the Subcontractor shall provide a Contract change proposal to the Prime Contractor within a period of 24 days after receipt of such notice or such other period as agreed; or

b.    provide a Contract change proposal to the Subcontractor and the Subcontractor shall notify the Prime Contractor of any changes it requires to the Contract change proposal within 42 days of receipt.

10.1.4    The Prime Contractor may at its discretion require the Subcontractor to provide a not to exceed quote for the preparation of a Contract change proposal, prior to the Subcontractor preparing the Contract change proposal in accordance with clause 10.1.3. If the Prime Contractor exercises its discretion under this clause the Prime Contractor’s payment of the reasonable costs of preparation of a Contract change proposal under clause 10.1.6 or through amendment to the Contract under clause 10.1.5 shall not exceed the quote provided.

10.1.5    The Prime Contractor shall evaluate a Contract change proposal submitted under clause 10.1, and within 30 days after receipt, or such other period as may be agreed, shall either:

a.    approve the Contract change proposal and issue an amendment to the Contract; or

b.    reject the Contract change proposal giving reasons for such rejection.

10.1.6    The Prime Contractor shall meet the reasonable cost of preparation of a Contract change proposal required by the Prime Contractor even where not approve.

10.1.7    The Prime Contractor shall meet the reasonable cost of preparation of a Contract change proposal required by the Prime Contractor.

12    The applicant alleges and the respondent denies that the following terms were implied terms of the Subcontract. First, it was an implied term that neither party would by its own motion prevent the performance of the Subcontract by the other. Secondly, it was an implied term that neither party would do anything which would destroy the efficacy of the bargain into which the parties had entered. Thirdly, it was an implied term that each party would do all things necessary to enable the other party to have the benefit of the contract.

13    The contract between the Commonwealth and the respondent referred to in recital B of the Subcontract was referred to as the Prime Contract and I will refer to it in that way. It also had an acquisition phase and an O and S/M phase.

14    On 1 December 2010 the Commonwealth wrote to the respondent about what it called a proposal to separate the acquisition and support elements of the Prime Contract. The letter contained the following relevant passages:

2.    Further to discussions with CDNZ’s representatives in Townsville during the period 10 – 15 October 2010, the Commonwealth encloses an ASDEFCON Support contract (reference B), proposed as a replacement of the Operate and Support / Manage requirements of reference A. The key features of reference B include a revised payments structure within the pricing schedule and a more comprehensive performance schedule to addresses identified inadequacies in existing terms and conditions. To assist CDNZ in review, the Commonwealth provides a slide presentation outlining the background to this proposal, and salient aspects of reference B at Enclosure 2.

…

4.    The Commonwealth is committed to pursuing the contract separation on a cost-neutral basis, and has endeavoured to ensure that the obligations created by reference B are consistent with the current level of effort in existing reference A. Accordingly, the substance of the terms and conditions of reference A remain unchanged in the proposed reference B. The Commonwealth plans to extract support elements of reference B, which will remain in place to facilitate the acquisition requirements of Land134.

15    A number of matters about the letter should be noted at this stage. The proposal in December 2010 was that the O and S/M requirements in the Prime Contract be made the subject of a new ASDEFCON contract. There were some proposed differences, but at that point the Commonwealth was of the view that the substance of the terms and conditions would remain unchanged.

16    On 18 March 2011 the respondent wrote to the applicant advising it of the Commonwealth’s request to replace ‘the existing SMART – 2000 support contract with a contract which complies with the ASDEFCON template’. It said that it had reviewed the ASDEFCON contract and prepared a flow-down version of the contract for review by the applicant. It asked the applicant to inform itself of the issues and be in a position to discuss them with the respondent.

17    Between 18 March 2011 and 26 May 2011 there were negotiations between the applicant and the respondent about a new subcontract between them. Those negotiations did not result in an agreement between the applicant and the respondent. There is a dispute between the parties about the precise content and effect of the negotiations. The applicant claims that the respondent made various representations to it during the course of the negotiations and those representations form the basis of its claims for misleading or deceptive conduct and unconscionable dealing. I heard evidence about the negotiations on the hearing of the separate question. The respondent tendered an affidavit of Mr Eric John Stierna who is the respondent’s program manager for the Prime Contract. Mr Stierna was briefly cross-examined. The applicant in reply tendered an affidavit of Mr Ian Robert Smith who is the manager of the product and support group and acting Land 134 project manager for the applicant. Mr Smith was also briefly cross-examined.

18    Mr Stierna deposed to the fact that the key areas of disagreement regarding the conditions of contract at the end of the negotiations were as follows:

(a)    termination for convenience: As explained above at paragraph 19(b) Cubic considered the termination for convenience clause to be critical given the challenges posed by the performance management framework in the proposed Attachment R and the short timelines for termination for default under the performance banding scheme in the ASDEFCON template;

(b)    option to extend: The Sub Contract contained no right of automatic extension. Cubic did not wish to add such a right in any ASDEFCON subcontract as it would not allow Cubic the necessary flexibility to negotiate with the Commonwealth regarding price and service delivery if the Commonwealth wished to extend the term of the ASDEFCON contract with Cubic. Cubic considered this flexibility necessary to ensure that it could continue to deliver the highest quality services to the Commonwealth at a competitive price; and

(c)    right of first refusal: The right of first refusal related to any additional services required by the Commonwealth on an ad hoc basis. BAE had this right under the Sub Contract. However, in my experience, the operation of this right under the Sub Contract had resulted in multiple renegotiations with BAE as to price and quality for services requested which were relatively simple. It was an administratively difficult process and did not, in my view, ensure delivery of the best quality outcomes at the best price as it involved multiple overheads and wasted time and resources.

19    The applicant in its letter to the respondent dated 26 May 2011 referred to the following ‘open’ issues:

BAE Systems requests that CDNZ reconsider its position regarding the following open issues, and provide a written response prior to our next meeting:

1.    Contractor’s Option to Extend – BAE Systems requests that given the positive feedback from the Commonwealth regarding BAE Systems’ performance on the Land 134 project, and subject to continued positive performance of BAE Systems, which is to be measured via Attachment R, any contract extension received by CDNZ will be flowed down to BAE Systems.

2.    Termination for Convenience – BAE Systems requests that the Contractor shall only be afforded the right to terminate for convenience if its contract with the Commonwealth is terminated, for any reason. CDNZ has sufficient remedies under the subcontract to terminate should BAE Systems be in breach of the subcontract, and therefore BAE Systems views this as a reasonable request.

20    On 31 October 2011 the respondent wrote to the applicant about the Subcontract and said, among other things, the following:

Please be advised that the Commonwealth of Australia has terminated for convenience that portion of Prime Contract Number C438921 that includes all Operations Support and Maintenance (O/S&M) requirements. Cubic Defence New Zealand (‘Cubic’), in turn, hereby terminates for convenience all of the corresponding O/S&M requirements in Contract Number SC-BAE AU CTC LIS (‘the Contract’) pursuant to Contract Clause 12.3.1. This termination for convenience is effective as of 29 November 2011.

21    The respondent’s letter also contained a Termination Direction and Schedule and that required among other things, the applicant to stop work on the Subcontract by close of business on 29 November 2011.

22    On 1 November 2011 the applicant asked the respondent to provide it with evidence of the Commonwealth’s Notice of Termination for convenience of that portion of the Prime Contract that included all O and S/M requirements. On 2 November 2011 the respondent provided the applicant with a copy of a CCP Deed apparently executed by the Commonwealth and the respondent pursuant to the Prime Contract on 28 October 2011. I will refer to this document as the Deed. On the same day the Commonwealth and the respondent entered into an ASDEFCON contract which had been negotiated between them.

23    Clause 12.3 of the Subcontract is in the following terms:

12.3    Termination for Convenience

12.3.1    In addition to any other rights it has under the Contract, the Prime Contractor may terminate the Contract or reduce the scope of the Contract by notifying the Subcontractor in writing only where;

a.    it has received a corresponding notice to that effect from the Commonwealth, or

b.    where the Prime Contractor becomes liable for Postponement costs due to a postponement event continuing beyond a period of 60 days in accordance with clause 6.3b.

c.    where the Prime Contractor has been terminated by the Commonwealth for any reason provided for under the Prime Contract.

12.3.2    Should the Prime Contractor wish to terminate or reduce the scope without such notice from the Commonwealth, then such action shall not be taken without agreement from the Contractor.

12.3.3    Where the Prime Contractor issues a notice under clause 12.3.1, the Subcontractor shall:

a.    stop work in accordance with the notice;

b.    comply with any directions given to the Subcontractor by the Prime Contractor; and

c.    mitigate all loss, costs (including the costs of its compliance with any directions) and expenses in connection with the termination, including those arising from affected Subcontracts.

12.3.4    The Prime Contractor shall only be liable for:

a.    payments under the payment provisions of the Contract for work conducted before the effective date of termination; and

b.    any reasonable costs incurred by the Subcontractor that are directly attributable to the termination,

where the Subcontractor substantiates these amounts to the satisfaction of the Prime Contractor.

12.3.5    The Subcontractor shall not be entitled to profit anticipated on any part of the Contract terminated.

12.3.6    The Subcontractor, in each Approved Subcontract, shall secure the right of termination and provisions for compensation functionally equivalent to that of the Prime Contractor under clause 12.3. The Prime Contractor will not meet the costs to the Subcontractor arising from a failure to implement this clause 12.3.6.

12.3.7    If the Prime Contractor terminates the Contract for convenience in accordance with Clause 12.3 then, providing any outstanding amounts owed by the Subcontractor to the Prime Contractor have been repaid, the Subcontractor may apply for release of any outstanding securities.

24    Clause 12.3 of the Prime Contract is in the following terms:

12.3    Termination for Convenience

12.3.1    In addition to any other rights it has under the Contract, the Commonwealth may terminate the Contract or reduce the scope of the Contract by notifying the Contractor in writing.

12.3.2    Where the Project Authority issues a notice under clause 12.3.1, the Contractor shall:

a.    stop work in accordance with the notice;

b.    comply with any directions given to the Contractor by the Commonwealth; and

c.    mitigate all loss, costs (including the costs of its compliance with any directions) and expenses in connection with the termination, including those arising from affected Subcontracts.

12.3.3    The Commonwealth shall only be liable for:

a.    payments under the payment provisions of the contract for work conducted before the effective date of termination; and

b.    any reasonable costs incurred by the Contractor that are directly attributable to the termination,

where the Contractor substantiates these amounts to the satisfaction of the Project Authority.

12.3.4    The Contractor shall not be entitled to profit anticipated on any part of the Contract terminated.

12.3.5    The Contractor, in each Approved Subcontract, shall secure the right of termination and provisions for compensation functionally equivalent to that of the Commonwealth under clause 12.3. The Commonwealth will not meet the costs to the Contractor arising from a failure to implement this clause 12.3.5.

12.3.6    If the Commonwealth terminates the Contract for convenience in accordance with Clause 12.3 then, providing any outstanding amounts owed by the Contractor to the Commonwealth have been repaid, the Contractor may apply for release of any outstanding securities.

The Applicant’s Case in Relation to the Purported Notice of Termination Dated 31 October 2011

25    The applicant’s principal submission was as follows. The respondent’s letter dated 31 October 2011 purported to terminate the Subcontract between it and the applicant. The respondent could only do that under clause 12.3.1 of the Subcontract where the respondent had received ‘a corresponding notice to that effect’ from the Commonwealth and in the circumstances that meant a notice under clause 12.3.1 of the Prime Contract. The Deed and ASDEFCON contract between the respondent and the Commonwealth did not constitute a notice of termination of the Prime Contract and therefore the power to terminate in clause 12.3.1 was not engaged.

26    The applicant characterised the effect of the Deed and the ASDEFCON contract in various ways in its written outline of submissions. Its principal submission was that the documents constituted a reduction ‘in the scope of the contract’. In another part of its outline of submissions it made reference to ‘a varied form of contract’, and an amendment to the Prime Contract, ‘so as to modify the conditions governing the delivery of O & S/M services’ or it said that the Deed ‘merely varied the terms of delivery for the O & S/M services by reformatting delivery of those services into an ASDEFCON contract’. A little later the applicant said:

… Cubic was only entitled to reduce the scope of the Subcontract in the same manner as that ‘effected’ by the variation to the Prime Contract to incorporate delivery terms for O & S/M services in the form of the ASDEFCON conditions of contract introduced by CCP.

27    In its written Response to Respondent’s Submissions being its written reply, the applicant placed more weight on a submission that the Deed and the ASDEFCON contract constituted a variation or amendment to the Prime Contract rather than a reduction in its scope.

28    However, either way the applicant’s principal submission was that the Deed and the ASDEFCON contract did not terminate the Prime Contract and that therefore the power in clause 12.3.1 of the Subcontract was not engaged so as to permit the respondent to terminate that contract.

29    The foregoing argument was based on the express terms of the Subcontract.

30    The applicant also put an argument by reference to what it said were implied terms of the Subcontract.

31    The applicant’s pleading of its implied terms case was as follows:

10.    It was an implied term of the existing Contract that neither party would by its own motion prevent the performance of the existing Contract by the other.

Particulars

The term is implied as a matter of Law.

11.    It was an implied term that neither party would do anything which would destroy the efficacy of the bargain into which the parties had entered.

Particulars

The term is implied as a matter of Law.

12.    It was an implied term that each party would do all things necessary to enable the other party to have the benefit of the Contract.

Particulars

The term is implied as a matter of Law.

…

28.    In breach of the implied terms set out in paragraph 10 Cubic has by its own motion, prevented the performance of the existing Contract.

Particulars

Cubic has entered into an ASDEFCON contract with the Commonwealth through a CCP Deed dated 28 October 2011, by which it has excised the Statement of Works in the existing Contract and transferred those works to the ASDEFCON contract. In reliance upon that transfer Cubic has purported to terminate the existing contract pursuant to clause 12.3.1 of the existing Contract.

29.    In breach of the implied terms set out in paragraph 11, Cubic has destroyed the efficacy of the bargain into which the parties had entered.

Particulars

Cubic has entered into an ASDEFCON contract with the Commonwealth through a CCP Deed dated 28 October 2011, by which it has excised the Statement of Works in the existing Contract and transferred those works to the ASDEFCON contract. In reliance upon that transfer Cubic has purported to terminate the existing contract pursuant to clause 12.3.1 of the existing contract.

30.    In breach of the implied terms set out in paragraph 12, Cubic has failed to do all things necessary to enable BAE to have the benefit of the existing Contract.

Particulars

Cubic has entered into an ASDEFCON contract with the Commonwealth through a CCP Deed dated 28 October 2011, by which it has excised the Statement of Works in the existing Contract and transferred those works to the ASDEFCON contract. In reliance upon that transfer Cubic has purported to terminate the existing contract pursuant to clause 12.3.1 of the existing contract.

32    I will refer to the first alleged implied term as the prevention principle (K Lewison and D Hughes, The Interpretation of Contracts in Australia (Lawbook Co, 2011) [6.12]) (‘The Interpretation of Contracts in Australia’) and the third alleged implied term as the duty of co-operation. For reasons I will give, I think the second alleged implied term is no more than an emanation of the first alleged implied term or simply a different way of expressing it.

33    In its case in chief and then in reply the applicant expanded on what the alleged implied terms required the respondent to do in the circumstances of this case.

34    As to the prevention principle, the applicant contended that it required the respondent to enter into a CCP with the Commonwealth which simply varied the Prime Contract from the existing terms and provided for delivery of the O & S/M services by reference to ASDEFCON terms where it could ‘just as easily’ do so or to do all that was necessary to ensure that the terms by which it continued to deliver O & S/M services to the Commonwealth would not preclude or exclude the applicant from its entitlement to deliver those same O & S/M services pursuant to the Subcontract. In its Response to Respondent’s Submissions it put the matter thus:

… it was an implied term of the Subcontract that Cubic ought to have passed on the effect of the CCP 57 which incorporated the ASDEFCON contract as an amendment to the Prime Contract. Such an approach would have avoided creation of the artifice that somehow there had been either a termination or reduction in the scope of the Prime Contract because the O&S/M services were to be delivered via the ASDEFCON contract. Cubic ought to have stepped down the ASDEFCON contract entered into by it, through clause 10, as initially it proposed and embarked upon doing. No proper explanation of why Cubic abandoned this process with BAE is given anywhere in either the Respondent’s submissions, or the Stierna affidavit, apart from a weak reference to an ‘impasse’ in the negotiations which is entirely unsupported by the objective contemporaneous documents.

35    As to the duty of cooperation, the applicant’s case was the notice from the Commonwealth under the Prime Contract had ‘the effect’ of preserving the respondent’s entitlement to continue provision of the O & S/M services, but by reference to a varied form of contract and that the respondent was bound to pass on the effect of that notice to the applicant. In its Response to the Respondent’s Submissions the applicant alleged that the benefit promised by the respondent was the applicant’s right to provide O & S/M services for so long as these were required to be provided by the respondent to the Commonwealth.

36    Before the hearing I raised with the parties the question of whether the Commonwealth was a necessary or proper party to the proceeding. Both parties said that they did not think that the Commonwealth was a necessary or proper party.

37    It is convenient to consider the issues (as the parties did in their submissions) first by reference to the express terms of the Subcontract and then by reference to those terms and such implied terms as I hold are part of the Subcontract.

Express Terms

38    The respondent’s letter to the applicant dated 31 October 2011 states that it terminates for convenience all of the ‘corresponding O/S & M requirements in Contract No SC-BAE AU CTC LIS’ pursuant to clause 12.3.1 of the Subcontract. The notice makes it clear that the ‘corresponding O/S & M requirements’ means the O/S & M requirements which correspond to the Operations Support and Maintenance Requirements in the Prime Contract. The letter states that the Commonwealth has terminated for convenience ‘that portion’ of the Prime Contract that includes all O & S/M requirements.

39    Clause 12.3.1 of the Subcontract refers to the Prime Contractor ‘notifying the Subcontractor in writing’. It does not refer to a notice in writing nor is any particular form of notice specified under the clause. Clause 12.3.1 of the Prime Contract is in similar terms. It seems to me that a corresponding notice from the Commonwealth may be constituted by a Deed to which the recipient of the notice is a party.

40    The respondent’s power to act under clause 12.3.1 of the Subcontract was conditional on the respondent receiving a corresponding notice to that effect from the Commonwealth. I think that to fulfil that description the notice from the Commonwealth must terminate the Prime Contract or reduce the scope of the Prime Contract in the same way as the respondent has purported to do under the Subcontract. Did the respondent receive such a notice from the Commonwealth?

41    The starting point is the Commonwealth’s letter to the respondent dated 1 December 2010. That in itself was not a notice from the Commonwealth to the respondent within the meaning of clause 12.3.1 of the Prime Contract, but it did contain an expression of the Commonwealth’s intention. For example, it contains the following statement:

4.     The Commonwealth is committed to pursuing the contract separation on a cost-neutral basis, and has endeavoured that the obligations created by reference to B [Draft ASDEFCON Support Contract No: 2009/1121243] are consistent with the current level of effort in existing reference A [CAPO No C438921 dated 29 Jan 2003 as amended 30 Nov 2007].

42    I turn to the provisions of the Deed. On the face of it, the Deed has features of both a CCP under the Prime Contract and a notice by the Commonwealth under clause 12.3.1 of the Prime Contract.

43    As to the former the document is entitled ‘Contract Change Proposal (CCP) Deed’ and is in the form and layout specified in Attachment K of the Prime Contract for variations under clause 10 of the Contract. Furthermore, it contains a recital in the following terms:

B. The Contract provides that changes are to be dealt with by CCP on the basis of this Deed’.

Under the heading ‘Scope of Work’ the following appears:

Removal of Reference to Operate and Support/Manage (O & S/M) requirements as now covered by a separate contract, DMO/LSD/00301/ 2011.

As to the latter (that is, indications that it was notice by the Commonwealth under clause 12.3.1 of the Prime Contract) under the headings in the form of ‘Details of Proposed Change (Mandatory):’ and ‘Justification for Proposed Change (Mandatory):’ the following appears:

Details of Proposed Change (Mandatory):

Introduction

The Amended Contract C438921 attached represents the deletion of the Operate and Support/Manage (O & S/M requirements from this Contract.

Justification for Proposed Change (Mandatory):

The purpose of this CCP is to reduce the scope of this Contract C438921 by removing all of the Operate & Support/Manage (O & S/M) requirements from this Contract pursuant to sub-clause 12.3.1 of Clause 12.3 (Termination for Convenience). The Commonwealth and the Contractor intend that the O & S/M requirements deleted from this Contract will form the basis of a separate performance based ASDEFCON contract which is executed at the same time as and legally binds the Commonwealth and the Contractor from the date this CCP takes effect.

44    I will come back to consider the effect of the fact that the respondent is a party to the Deed in the context of the applicant’s implied terms case. However, for present purposes the important point is that the Deed records in writing an act the Commonwealth considered that it was taking. Taking the words at face value, the Commonwealth considered that it was acting under clause 12.3.1 of the Prime Contract to reduce the scope of the Prime Contract by removing all of the O and S/M requirements from that Contract.

45    The words in the Deed do not seem to constitute a termination of the Prime Contract by the Commonwealth. As I understand it, it may have been open to the Commonwealth to terminate the Prime Contract. A termination of the Prime Contract would not have affected warranties, guarantees and other benefits provided by it and future O and S/M requirements were to be the subject of a separate ASDEFCON contract. Nevertheless, the terms of the Deed are such that I do not think that they constitute notice to the respondent of the termination of the Prime Contract. What the Commonwealth purported to do was reduce the scope of the Prime Contract, or to effect what a layman might describe as a partial termination of the Prime Contract.

46    As I understood the applicant’s submission it was that in reality what the Commonwealth did was agree to a variation or amendment to the Prime Contract. If the effect of what occurred was no more than a variation of the Prime Contract then the respondent could not proceed under clause 12.3.1 of the Subcontract and was bound to proceed under clause 10 which is the variation of contract clause. If the effect of what occurred was a variation of the Prime Contract which amounted to a reduction in the scope of the Prime Contract, then although that engaged clause 12.3.1 of the Prime Contract it was a reduction in scope from the O and S/M requirements of the Prime Contract to the O and S/M requirements in the ASDEFCON contract. It was that which the respondent was bound to, but did not, pass on to the applicant under clause 12.3.1 of the Subcontract.

47    There was debate before me as to whether the Deed was a variation of the Prime Contract by consent or a termination of the Prime Contract by consent. I was referred to a leading authority on that distinction: Tallerman & Co Pty Ltd v Nathan’s Merchandise (Victoria) Pty Ltd (1957) 98 CLR 93 (‘Tallerman’)

48    Tallerman involved a written contract for the sale of goods. There was correspondence between the parties about the conditions for delivery of the balance of the goods and the question before the High Court was as to the effect of this correspondence. Williams J described the difference between variation and rescission as a real one and (at 124) he referred to the words of Lord Dunedin in Morris v Baron & Co [1918] AC 1 at 25-26:

The difference between variation and rescission is a real one, and is tested, to my thinking, by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself.

49    Taylor J referred to the difference and identified the test for determining the difference in the following passage (at 144):

It is firmly established by a long line of cases commencing at least as early as Goss v. Lord Nugent and ending with cases such as Morris v. Baron & Co. and British & Beningtons Ltd. v. North Western Cachar Tea Co. Ltd.—and, indeed, including Goss v. Lord Nugent itself—that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement. Variation, of course, may involve partial rescission as is pointed out in Salmond and Williams on Contracts, 2nd ed. (1945), pp. 488, 489, but ‘Partial rescission ... does not completely destroy the contractual relation between the parties. It merely modifies that relation by cutting out part of the rights and obligations involved therein, with or without the substitution of new rights and obligations in their place. Partial rescission is not the extinction of the contract but the variation of it.’ Hence it is said ‘A contract may be varied by way of partial rescission without the substitution of new terms in place of those rescinded, or by way of partial rescission with the substitution of new terms for those rescinded, or by the addition of new terms without any partial rescission at all.’ These passages, in my view, correctly state the accepted view of the manner in which an agreement by way of variation operates.

(See also Kitto J at 135.)

50    Taylor J’s reasons have been referred to with approval in subsequent cases: Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household and Body Care (Australia) Pty Limited (2000) 201 CLR 520 at 534 [23]-[24] per Gleeson CJ, Gaudron, McHugh and Hayne JJ; Dan v Barclays Australia Ltd (1983) 57 ALJR 442 at 448-449 per Wilson and Dawson JJ; Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 698-699 [19] per Gleeson CJ, Gaudron and Gummow JJ.

51    It seems to me that if one looks at the Deed solely from the point of view of what the Commonwealth was doing under the Prime Contract then I think it was reducing the scope of the Prime Contract. If one looks at the whole contract including the acquisition phase then the deletion of the O and S/M requirements for the future is a reduction in the scope of the contract. Even if one simply focuses on what in practical terms remains (that is, O & S/M requirements in the future) then a reduction to nil is nevertheless a reduction in the scope of the contract.

52    If one looks at the Deed more broadly and includes the intimation that the parties will enter into an ASDEFCON contract and indeed the entry into the ASDEFCON contract, I think a similar result follows. It does not seem to me to fit neatly into either a variation by consent or a termination by consent. It is not a variation by consent because a new free-standing contract (that is, the ASDEFCON contract) comes into existence which forms the entire basis of the parties’ contractual relationship as to future O and S/M requirements. It is not a termination by consent because the Prime Contract continues minus O and S/M requirements to be performed in the future. Nevertheless, the contract in clause 12.3.1 is the Prime Contract and I am satisfied that there has been a reduction in the scope of that contract. That contract has been reduced in scope by the deletion of the O and S/M requirements to be performed in the future.

53    I turn now to the effect of the respondent’s letter to the applicant dated 31 October 2011. The letter refers to the Commonwealth terminating for convenience that portion of the Prime Contract ‘that includes all Operations Support and Maintenance (O/S & M) requirements’ and the respondent in turn terminating for convenience ‘all of the corresponding O/S & M requirements’ in the Subcontract. I do not think that the fact that the Deed does not use that precise language means that there is not the necessary correspondence between the Commonwealth’s acts under the Prime Contract and the respondent’s acts under the Subcontract. It seems to me that it is the substance of what occurred which matters and that the substance of what occurred was the same under both contracts. Furthermore, I do not think that the respondent failed to pass on to the applicant the reduced scope of the contract. As I have already said, the reduced scope of the respondent’s contract with the Commonwealth (that is, the Prime Contract) was a contract minus the O & S/M requirements to be performed in the future.

54    The applicant’s arguments having regard only to the express terms of the Subcontract must be rejected. I turn now to consider its arguments having regard to the express terms of the Subcontract and such implied terms as I hold are part of the Subcontract.

Implied Terms

55    In Stirling v Maitland (1864) 5 B & S 840 at 852 Lord Cockburn CJ described what I have referred to as the prevention principle in the following terms:

I look on the law to be that, if a party enters into an arrangement which can only take effect by the continuance of a certain existing state of circumstances, there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances, under which alone the arrangement can be operative. I agree that if the Company had come to an end by some independent circumstance, not created by the defendants themselves, it might very well be that the covenant would not have the effect contended for; but if it is put an end to by their own voluntary act, that is a breach of covenant for which the plaintiff may sue. The transfer of business and dissolution of the Company was certainly the act of the Company itself, so that they have by their act put an end to the state of things under which alone this covenant would operate.

56    The prevention principle has been described as the negatively expressed duty of co-operation: Australis Media Holdings Pty Ltd v Telstra Corporation Ltd (1998) 43 NSWLR 104 at 123.

57    The second alleged implied term, that is to say a term that neither party would do anything which would destroy the efficacy of the bargain into which the parties had entered seems to be another way of expressing the prevention principle: O’Keefe v Williams (1907) 5 CLR 217 at 230 per Isaacs J; O’Keefe v Williams (1910) 11 CLR 171 at 191 per Griffith CJ; at 197 per Barton J; at 210 per Isaacs J; Peters (WA) Limited v Petersville Limited (2001) 205 CLR 126 at 142 [36] per Gleeson CJ, Gummow, Kirby and Hayne JJ.

58    As to the duty of cooperation, Lord Blackburn said in the leading case of Mackay v Dick (1881) 6 App Cas 251 at 263:

I think I may safely say, as a general rule, that where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. What is the part of each must depend on circumstances.

59    In Secured Income Real Estate (Australia) Ltd v St Martins Investments Pty Ltd (1979) 144 CLR 596, Mason J (as his Honour then was) said at 607-608:

It is easy to imply a duty to co-operate in the doing of acts which are necessary to the performance by the parties or by one of the parties of fundamental obligations under the contract. It is not quite so easy to make the implication when the acts in question are necessary to entitle the other contracting party to a benefit under the contract but are not essential to the performance of that party's obligations and are not fundamental to the contract. Then the question arises whether the contract imposes a duty to co-operate on the first party or whether it leaves him at liberty to decide for himself whether the acts shall be done, even if the consequence of his decision is to disentitle the other party to a benefit. In such a case, the correct interpretation of the contract depends, as it seems to me, not so much on the application of the general rule of construction as on the intention of the parties as manifested by the contract itself.

60    There are many cases dealing with the prevention principle and the duty of cooperation. A number of illustrations are given in The Interpretation of Contracts in Australia (paragraphs 6.12 and 6.13).

61    The Subcontract contains an entire agreement clause which is in the following terms:

1.4    Entire Agreement

1.4.1    This Contract, as varied from time to time, is an exhaustive statement of the parties’ contractual obligations and supersedes and replaces all statements, representations or possible undertakings that were the subject of discussion or correspondence between the parties, or that occurred during the tender process, prior to signing this Contract. To the extent permitted by law, any representation, statement, advice or information provided by the Prime Contractor, whether negligent or otherwise, is not actionable by the Subcontractor unless it is included as a term of this Contract.

62    The respondent contended that this clause precluded the implication of the prevention principle and the duty of cooperation.

63    The leading case is Hart v MacDonald (1910) 10 CLR 417 (‘Hart v Macdonald’). That case involved a contract for the erection of a dairy plant and butter factory. A term of the contract between the parties was as follows:

It is to be understood that there is no agreement or understanding between us not embodied in this tender and your acceptance thereof.

64    The High Court held that the entire agreement clause did not preclude the implication of a term of the contract. Griffith CJ said (at 421):

The application of that rule is not affected by the inclusion in the contract of the term I have read, that it is to be understood that there is no agreement or understanding not embodied in the tender. A contract to the effect stated in the first count of the declaration arises by necessary implication upon a proper construction of the express words.

Isaacs J said (at 430):

The agreement contains this provision: ‘It is to be understood that there is no agreement or understanding between us not embodied in this tender and your acceptance thereof.’ It was urged that this provision excluded implications. But that is not so. It excludes what is extraneous to the written contract: but it does not in terms exclude implications arising on a fair construction of the agreement itself, and in the absence of definite exclusion, an implication is as much a part of a contract as any term couched in express words.

65    I recognise that the terms of clause 1.4 of the Subcontract are different from the terms of the clause considered by the High Court in Hart v MacDonald. Nevertheless, assuming for the purposes of argument that the prevention principle and the duty of cooperation may be excluded by express words of a contract, those words would need to be very clear before a court held that that result had been achieved. The words of clause 1.4 are not so clear as to achieve that result. It seems to me that clause 1.4 precludes reliance on representations, statements, advices or information extraneous to the contract, but not implied terms of the nature alleged by the applicant.

66    As far as the prevention principle is concerned the difficulty for the applicant is that there is no evidence that conduct on its part has prevented the performance of the Subcontract. The alleged breach is set out above ([31] [34]). There is no evidence or at least no sufficient evidence that the respondent had any option other than to enter into the Deed and the ASDEFCON contract. In fact the evidence, so far as it goes, seems to me to suggest the contrary. The letter from the Commonwealth to the respondent dated 1 December 2010 suggests that the Commonwealth wished to create two contracts including a freestanding ASDEFCON contract dealing with O and S/M requirements to be performed in the future.

67    As far as the duty of cooperation is concerned, the difficulty for the applicant with the pleaded breach (see [31] above) is that it is expressed in negative terms, that is to say, the plea is that the respondent did certain things which constituted a breach of the term. The plea does not identify the acts the respondent should have performed to comply with its duty of cooperation.

68    The applicant put a submission about the duty of cooperation which I think was to the following effect. Even if it is accepted that, by the Deed the Commonwealth notified the respondent of a termination or reduction in scope of the Prime Contract by the removal of O & S/M requirements to be performed in the future, the effect of the Commonwealth’s notice was to vary the Prime Contract and the respondent’s duty of cooperation under the Subcontract required the respondent to pass on the contractual provisions with respect to O & S/M requirements in the ASDEFCON contract as variations under clause 10 of the Subcontract. Clause 10 is set out above (at [11]). There is a very similar provision in clause 10 of the Prime Contract.

69    A number of questions arise in relation to this submission. First, it is necessary to consider whether the factual allegations forming the basis of the submission are clearly pleaded. Secondly, it is necessary to consider whether, in the circumstances, it was part of the respondent’s duty of cooperation to pass on the ASDEFCON provisions as a variation under clause 10. That question in turn involves two questions, being the legal question of whether the general obligation of cooperation included that particular obligation and a factual question of whether it would have been possible for the respondent to proceed in that way.

70    The alleged breach of the duty of cooperation pleaded in the Further Amended Statement of Claim is set out above (at [31]). As I have said, the plea is primarily of something the respondent did which it should not have done, rather than of something it was required to do but did not. I do not think the allegations forming the basis of the submission I am presently considering are pleaded. As I have said, the applicant also made written submissions both in chief and in reply. Those submissions come much closer to putting the submission I am presently considering than the Further Amended Statement of Claim (Outline of Submissions paragraph 22; Applicant’s Response to Respondent’s Submissions paragraph 26). In view of the fact that this matter has come on for hearing very urgently I will not decide this point against the applicant on the basis that the matter has not been adequately pleaded.

71    In order to succeed with this submission, the applicant needs to show that the requirements of the ASDEFCON contract could have been effected as variations under clause 10 of the Subcontract: Downer Connect Pty Ltd v McConnell Dowell Constructors (Australia) Pty Ltd (No 2) [2008] VSC 443. The fact that there were negotiations between the applicant and the respondent in March, April and May 2011 might be taken to suggest that this was so, although the respondent may have been negotiating with a view to a new contract. It would need to be shown that the ‘sticking points’ from the respondent’s point of view (see [18] above) were not matters it could insist upon if it had an obligation to pass on the ASDEFCON provisions as variations under clause 10. Furthermore, it would need to be accepted that, despite the respondent’s apparent discretion to accept or reject contract changes under clause 10.1.5 of the Subcontract, the duty of cooperation required the respondent to approve the changes.

72    I think the applicant’s submission breaks down at a quite fundamental level. Under the Subcontract the applicant has agreed to provide and the respondent has agreed to receive certain O & S/M services. In that sense the parties have agreed ‘that something shall be done’ to use the words of Lord Blackburn in Mackay v Dick. However, the obligation is not an absolute and unqualified one. The parties have not agreed to do all things necessary for the performance of that obligation, or to ensure the applicant receives the benefit of the performance of that obligation, because they have expressly qualified the performance of that obligation by the terms of clause 12.3 of their contract. As I have already found, the circumstances which engage the operation of that clause were present. I do not think the rights of the respondent by reason of clause 12.3 of the Subcontract are qualified by the duty of cooperation in the manner contended for by the applicant.

73    The applicant’s arguments having regard to the express terms of the Subcontract and the implied terms it alleges must be rejected.

conclusion

74    The separate question should be answered in the affirmative. I will hear the parties on consequential and other orders.

Associate:

Dated:    14 December 2011