AGS legal notes - Commercial Notes No. 8

No. 8
17 January 2004

The GEC Marconi Decision – its Effect on Australian
Government Contracting

GEC Marconi Systems Pty Limited v BHP Information Technology
Pty Limited

Federal Court of Australia
12 February 2003 and 14 July 2003
[2003] FCA 50; [2003] FCA 688

Background

Proceedings were initially commenced by GEC Marconi against
BHP IT in September 1997. Subsequently, in December 1997
BHP IT brought an action against the Commonwealth seeking
to be indemnified for GEC Marconi's claim, and seeking
damages in its own right against the Commonwealth. There
were two claims that totalled $85m against the Commonwealth.
First there was BHP IT's direct claim of about $20.8m,
and secondly there was GEC Marconi's indirect claim,
that would have been passed on by BHP IT to the Commonwealth,
of about $65m. The Commonwealth also brought a much smaller
cross claim against BHP IT. The Commonwealth defeated the
claims brought against it and succeeded in recovering just
under $0.5m from BHP IT.

Finn J, although finding that the Commonwealth had in
two minor respects breached its contractual obligations,
found BHP IT were unable to establish any loss that flowed
from such breaches. In the second decision Finn J said
that BHP IT's misleading and deceptive conduct case
would, in all probability, have failed.

The principal decision was handed down by Finn J on 12
February 2003. The second decision of 14 July 2003 dealt
with the award of costs and interest in the proceedings.

The ADCNET project

In 1989 the Department of Foreign Affairs and Trade (DFAT)
commenced a project to develop the Australian Diplomatic
Communications Network (ADC Network) which would both revolutionise
and modernise its system for diplomatic communications.
The project ran for ten years and cost over $120m. The
ADC Network provided for communications to occur between
DFAT's Canberra office, its overseas missions, state
offices, other select government departments, the Prime
Minister and Minister for Foreign Affairs and Trade. One
of the key imperatives that drove the ADCNET project was
the need to replace its 'security gateway' system.
A security gateway system, as the name implies, allows
only certain documents to move out of the secure network.

The initial contracts

After calling and assessing tenders for the Prime System
Integrator, the Commonwealth entered into a contract with
BHP IT for the provision of prime integration services.
As part of BHP IT's tender it engaged GEC Marconi
(in 1989 known as EASAMS) to develop the specialised software
packages that would be integrated into the ADC Network.
The contract between the Commonwealth and BHP IT and the
contract between BHP IT and GEC Marconi were entered into
at almost the same time and in all essential respects,
except for price, were identical. BHP IT was the builder
of the ADC Network, and GEC Marconi its sub-contractor.

The initial contract between BHP IT and the Commonwealth
was on a 'time and materials' basis. Under
the initial contract the ADC Network was established with
rudimentary desktop software. DFAT decided that it was
better to have the system operational with rudimentary
software, than wait until the development of the ultimate
software before bringing the ADC Network into operation.

The final phase of the project

Once the ADC Network had been established, the focus of
DFAT, BHP IT and GEC Marconi turned to the final deliverable
under the ADCNET project, the development of the ultimate
release of software that would be incorporated into the
ADC Network and the replacement of the previous security
gateway system.

On 14 September 1994 the Commonwealth entered into a contract
with BHP IT (the Head Contract) and similarly BHP IT entered
into a contract with GEC Marconi (the Sub-contract). Like
the initial time and materials contracts these subsequent
contracts were identical in every material respect, except
price. The Head Contract and Sub-contract were, however,
fixed price contracts. The price under the Head Contract
was $9.6m and under the Sub-contract $6.2m. These subsequent
contracts provided for the development of the final release
of software and the incorporation of this software (the
ADCNET software) and specialised security devices known
as STUBS devices into the ADC Network. The STUBS devices
were the replacement for the security gateway.

STUBS devices

The STUBS devices were the invention of the Defence Science
and Technology Organisation of the Department of Defence.
The Department of Defence had granted to AWADI Defence
Industries (AWADI) a licence to exploit the STUBS devices' technology.

The Defence Signals Directorate advised DFAT that if it
used the new STUBS technology developed by the Defence
Science and Technology Organisation, approval would be
given for the ADC Network to carry classified information.

Prior to DFAT entering into the Head Contract by which
it was obliged to supply the STUBS devices to BHP IT, DFAT
sought a verbal assurance from AWADI that at least a prototype
of the STUBS devices would be provided to enable testing
of the ADCNET software. This assurance was given and DFAT
subsequently entered into the Head Contract.

At the time the Head and Sub-contracts were entered into
all parties (DFAT, BHP IT and GEC Marconi) were aware that
the Commonwealth had not entered into a contract with AWADI
for the supply of the STUBS devices.

Emulation software

Under the Head Contract the ADCNET software was required
to interface with the STUBS devices. The responsibility
for the performance of the STUBS devices was a matter for
DFAT and AWADI. Under the contracts neither BHP IT or GEC
Marconi accepted this responsibility.

Well before the Head and Sub-contracts were executed DFAT
expressed concern to both BHP IT and GEC Marconi that if
the STUBS devices were not available by the time acceptance
testing of the ADCNET software was to occur, there needed
to be an emulation of the STUBS devices to enable testing
to proceed unimpeded.

Software emulation is a common strategy used by software
engineers to overcome the unavailability of a hardware
component. Emulation software was proposed by DFAT if the
STUBS devices were not available for acceptance testing.

Performance of the Head and Sub-contracts

GEC Marconi's performance of the Sub-contract was
flawed from the outset. The reasons for its inability to
get on with the job are varied and many. When GEC Marconi
entered into the Sub-contract (in September 1994) it expected
to receive a profit of $620,000; by August 1996 GEC Marconi
realised it would sustain a loss of $4.5m if it continued
with the project and delivered the software it had contracted
to provide.

After execution of the Head Contract, DFAT wrote to AWADI
seeking confirmation of the verbal assurance it had been
given in connection with the supply of the STUBS devices.
AWADI did not respond to this request. DFAT became increasingly
concerned that even if the STUBS devices came they would
not be delivered in time for the development, integration
and acceptance testing of the ADCNET software. In December
1994 DFAT raised with BHP IT and GEC Marconi the development
of emulation software if the STUBS devices were not supplied
in time for development, integration and acceptance testing
of the ADCNET software.

Subsequently in the period June through to November (when
it became apparent that AWADI would not supply the STUBS
devices) the parties exchanged correspondence whereby it
was agreed that emulation software would be developed to
allow development, integration and acceptance testing of
the ADCNET software.

Was there an Emulation Variation Agreement?

Finn J had to determine whether there was an agreement
reached by the parties which varied the Head and Sub-contracts
despite imprecision and the uninformative nature of the
contractual documents upon which the contract variation
rested. The variation contended for by BHP IT and the Commonwealth
had the effect that neither the Commonwealth nor BHP IT
had to supply the STUBS devices and instead the STUBS Emulation
software was to be used to complete the contract (the Emulation
Variation Agreement).

The terms ... were not to be found in a simple documentary
exchange of an offer and an acceptance. Rather they
were to be discerned from communications made and actions
taken. Finn J

Clause 45 of the Head and Sub-contracts required that
any contractual variation would be in writing. GEC Marconi
argued that the Clause 45 requirements had not been met
and that this clause provided an exclusive method for the
varying of the Sub-contract. BHP IT argued that:

  • despite the uninformative description of the Change
    Request, there was sufficient compliance with Clause
    45
  • that it was not mandatory that the contract could
    only be varied by the method set out in Clause 45, it
    was possible for the parties to make an oral contract
    or impliedly by their conduct to vary the contract, and
  • in any event GEC Marconi had, by its conduct, waived
    any right to insist on strict compliance with Clause
    45.

Finn J posed the question this way [214]:

… the submissions raise the question whether the
legal effect of cl 45 was to render ineffective any subsequent
implied or oral contract the purport or effect of which
was to vary the Sub-Contract?

Finn J found that parties, despite stipulating that their
contract would only be varied in accordance with certain
specified procedures, could by their conduct vary their
contract subject to the proviso that there was no requirement
imposed as a matter of law that precluded such a variation.
He says at [217]–[219]:

The relevant principle, for present purposes, was stated
concisely by Ellicott J in the Crothall Hospital case
[(1981) 36 ALR 567] in the following terms (at 576):

"It is open to the parties to a written contract
to vary it. This may be done in writing or, except
where the contract is required by law to be
evidenced in writing, by oral agreement. The agreement
to vary may be express or implied from conduct." Emphasis
added.

The common, often fatal, difficulty experienced by a
party in seeking to make out a contract to vary has been
the evidentiary one of proof of the contract itself:
see Liebe v Malloy (1906) 4 CLR 347; Trimis
v Mina, [1999] NSWCA 140 at [64].

For an alleged subsequent variation to be contractually
effective notwithstanding non-compliance with the written
modification requirement, it must itself otherwise satisfy
the requirements of a valid contract, ie "the terms
of the arrangement must be certain, and … there
must generally be real consideration for the agreement: Ermogenous
v Greek Orthodox Community of SA Inc (2002) 187 ALR
92 at 99"

Internationally, the law varies widely as to the efficacy
of what are commonly described as "no oral modification" clauses
(a description I will use hereafter). The common law
rule in the United States has traditionally denied effect
to such clauses: eg Bartlett v Stanchfield 19
NE 549 (1889); Farnsworth, Contracts, §7.6
(3rd ed). As Cardozo J observed in Beatty v Guggenheim
Exploration Co 122 NE 378 (1919): "Whenever
two men contract, no limitation self-imposed can destroy
their power to contract again".

Finn J concludes at [250]:

... my own view is that what was agreed was no less
than the Emulation Variation Agreement ... The terms
of that contract were not to be found in a simple documentary
exchange of an offer and an acceptance. Rather they were
to be discerned from communications made and actions
taken ...
I do not consider that, in their setting, those communications
and actions admit of any other conclusion than what was
agreed was the Emulation Variation Agreement.

Are Representations by Australian Government Agencies
Contextual?

BHP IT's main argument on the misrepresentation
case against the Commonwealth was that the Commonwealth,
through DFAT, had misled BHP IT by not advising it of the
real reasons why the STUBS devices could not be procured.
DFAT had merely said that AWADI had cancelled the STUBS
devices project. BHP IT alleged that DFAT did not advise
it that AWADI's decision to cancel the STUBS devices' project
arose as a direct consequence of the Department of Defence's
decision not to procure the devices.

... representations made by one Australian Government
agency are to be considered in the context of that
agency's responsibilities and not assumed to
have wider implications for the Commonwealth. Finn
J

BHP IT argued that the Commonwealth's conduct taken
as a whole was misleading when DFAT's conduct and
the Department of Defence's position were considered
together. BHP IT said DFAT had given the impression that
the decision by AWADI to cancel the STUBS project was made
by AWADI. Finn J found that this was, in fact, literally
true [1360–1362].

I am not satisfied, though, that such lack of candour
would have had independent contractual significance for
present purposes. All parties were aware that the Commonwealth
in two different manifestations, ie DFAT and DoD, was
interested in procuring STUBS. Those two departments
furthered differing aspects of the public interests served
by the Commonwealth, ie foreign affairs and defence.
Though BHP-IT was formally dealing with the Commonwealth
in the ADCNET contract, it was perfectly well aware that
it was dealing with the Commonwealth in the discharge
of its foreign affairs responsibilities. It was for this
reason that the intentions of DFAT were the operative
intentions of the Commonwealth in relation to matters
affecting the ADCNET contract.

The furtherance of the Commonwealth's defence
responsibility was no part of the ADCNET contract. Though
a bona fide defence-related decision may (as here) have
impacted upon the Commonwealth's ability to perform
some part of the ADCNET contract, BHP-IT in dealing with
the Commonwealth was not reasonably entitled to expect
that the Commonwealth would not so act in discharging
its defence-related responsibilities – even if
this put the Commonwealth in a breach of the ADCNET contract
or rendered part of its performance impossible. BHP-IT
equally was not entitled to expect that in the conduct
of its defence responsibility the Commonwealth would
have regard to an aspect of its foreign affairs responsibility,
ie the performance of the ADCNET contract.

The DoD decision may have been the practical cause of
AWADI's cancellation of STUBS. However, for the
reasons I have given above, I do not consider that its
taking rendered the conduct of the Commonwealth unfair
or unreasonable in relation to its obligation to supply
STUBS under the Head Contract.

The significance of Finn J's decision on this point
is that representations made by one Government agency are
to be considered in the context of that agency's
responsibilities and not assumed to have wider implications
for the Commonwealth.

Affirmation by Election

As noted above DFAT was required under the Head Contract
to provide the STUBS devices. BHP IT in turn had to supply
GEC Marconi with the STUBS devices. DFAT, to overcome its
contractual obligation to supply the STUBS devices, proposed
that emulation software be developed to allow the development,
integration and acceptance of the ADCNET software to occur
without the actual STUBS devices.

… this is a clear case of affirmation and that
GEC Marconi's purported termination was an attempt,
opportunistically and too late, to avoid a "regretted
decision" it had long since made. Finn J

This proposal 'appeared' to be accepted by
both GEC Marconi and BHP IT. Later GEC Marconi tried to
use the non-provision of the STUBS devices as a means of
escaping the Sub-contract. DFAT raised a change request
which led to a contract variation for the development of
the STUBS emulation software. For reasons that remain unexplained,
whilst the Commonwealth and BHP IT varied the Head Contract,
a similar contract variation did not seem to be effected
under the Sub-contract.

There was no question however, that all the parties proceeded
on the basis that the STUBS devices would not be available
for the further development, integration and acceptance
testing of the ADCNET software. Suggestions from GEC Marconi
to the contrary were rejected by Finn J. At [389–390]
he makes this telling observation:

Mr Sharp [GEC Marconi's CEO] went on to admit
that he had read the Sub-Contract carefully and that
in or shortly prior to March 1996 he had fastened upon
the failure to provide STUBS as an opportunity for GEC
Marconi to escape from its obligations under the contract.

As Mr Hilton SC [the Commonwealth's Counsel] happily
put the matter, GEC Marconi was "content to proceed
[with the contract notwithstanding the non-provision
of STUBS]. Mr Wishart gave evidence to that effect. That's
what the documents say. It's only when the businessmen
took over the management of the contract that a commercial
decision was made to escape from the obligations … [B]y
then it is just too late".

The actual Change Requests and the formal Contract Amendment
were uninformative and did not spell out the agreement
reached by the parties that Finn J ultimately found. They
simply provided by their terms for the development of the
STUBS emulation software.

Before the Commonwealth and BHP IT had raised the STUBS
emulation software Change Request there was a plethora
of correspondence between the parties about the need to
develop the STUBS emulation software as the actual STUBS
devices would, it was initially thought, be late and as
subsequently advised not be provided at all.

The specifications for the STUBS emulation software were
discussed in detail so that it could be used to allow for
the continued development, integration and acceptance testing
of the ADCNET software. The correspondence in this period
was against the backdrop of the notifications by the Commonwealth,
initially that it could not supply the STUBS devices at
the times required by the Head Contract, and then not at
all.

Once GEC Marconi had developed the STUBS emulation software
it was demonstrated to both BHP IT and the Commonwealth
in February 1996. The Commonwealth advised that it appeared
suitable for the purposes of acceptance testing. The Commonwealth
paid BHP IT for the software. BHP IT in turn paid GEC Marconi.

BHP IT (and the Commonwealth) argued that if by its failure
to deliver the STUBS devices it was in breach of the Sub-contract
which entitled GEC Marconi to terminate that contract,
GEC Marconi had, by its subsequent conduct, lost that right.
It was argued
that GEC Marconi's conduct in progressing the development
of the ADCNET software, in developing the STUBS emulation
software, and making changes to various project documents,
were acts that were an unequivocal election to affirm the
contract.

The relevant legal principles concerning affirmation by
election are set out at [356]–[364] of the judgment.
In particular, Finn J says at [364]:

Distinct rationales have been advanced to support various
of the principles that make up the law of election. Because
of their relevance to the present matter, I would note
the following two matters. First, the requirements that
the election be made within a reasonable time (or, in
the US, promptly), and that it be irreversible have been
said to prevent the elector speculating on the future
progress of the contract at the other party's risk
... that other party, having no control over the choice
finally made, being vulnerable necessarily to the party
having the power of election. In consequence, these requirements
have been seen as having the capacity to help keep together
ongoing transactions, for example, construction contracts,
in which a breach has occurred sufficient to give rise
to the right to terminate. Secondly, and correspondingly,
the requirement that the election be communicated to
the party affected by the choice made has been said to
have no doubt been adopted:

" in the interests of certainty and because
it has been thought to be fair as between the parties
that the person affected is entitled to know where
he stands and that the person electing should not have
the opportunity of changing his election and subjecting
his adversary to different obligations": [Sargent
v ASL Developments Ltd (1974) 131 CLR 634 at 656].

Finn J concludes at [368]:

… this is a clear case of affirmation and ...
GEC Marconi's purported termination was an attempt,
opportunistically and too late, to avoid a "regretted
decision" it had long since made. The non-provision
of STUBS was not a "sleeper" that GEC Marconi
could awaken for its own advantage five months after
the cancellation of STUBS was announced … Given
the nature of the contractual relationship and what transpired
in the intervening five months, GEC Marconi had lost
its right to resort to cl 40 of the Sub-Contract to precipitate
a termination.

Entire Obligation Contracts

The keystone to any finding whether a contract is an entire
obligation contract, is rooted firmly in the construction
of that contract. This is an important issue so far as
software development and entire system (hardware, software
and firmware) contracts are concerned. It was DFAT's
avowed intention that the Head and Sub-contracts be entire
obligation contracts until such time as the ADCNET software
was delivered at Milestone 5000.

An entire obligation contract is one when the right to
payment arises only when the goods are delivered or the
services completely performed. In these contracts there
is no entitlement to payment if only part of the goods
are delivered or only part of the services are provided.
The goods and services must be entirely provided. Finn
J found that the Head and Sub-contracts were not entire
obligation contracts.

In the Head and Sub-contracts the entire obligation was
founded solely on the words 'Subject to achievement
of Milestone 5000' in Table 8.1 of Schedule 8. At
Milestone 5000, the ADCNET software for the Canberra based
system would be delivered and at that time DFAT would have
something of value under the contract. Apart from this
reference there was no other reference made in the contract
to the entire obligation.

If a contract or obligation is to be found to be
entire notwithstanding that the contract or obligation
provides for payment by instalments, the contract on
its proper construction must indicate that the instalments
are nonetheless conditional upon complete performance
of the contract or obligation, ie that they are refundable
if this does not occur because of the default of the
party that is to render the performance. Finn J
[706]

Under the Head and Sub-contracts unconditional financial
guarantees arose in favour of the customer at each point
the customer made a milestone payment to the contractor.
If the software did not meet acceptance the guarantees
could be called upon. Nothing was said in the clauses of
the Head and Sub-contracts that created the guarantees
which linked these clauses to Table 8.1 in Schedule 8,
and which contained the words 'Subject to achievement
of Milestone 5000'.

The omission to create the entire obligation in the clauses
of the Head and Sub-contracts was considered by Finn J
to be fatal. He said at [710]:

… the language of Table 8.1 provides a most oblique
way of achieving a most important effect for the contractors
if its purpose was to evidence an intention to make the
obligation an entire one.

and at [714]:

The reason I consider a clear and unambiguous provision
to the contrary would be necessary is because I consider
the actual terms and tenor of the Sub-Contract were quite
inconsistent with the obligation of entire performance
proposed by BHP-IT and the Commonwealth.

Finn J said that while each contractual milestone was
an entire obligation he was not satisfied that each of
the payments at the milestones that preceded Milestone
5000 were conditional upon the achievement of Milestone
5000. He found that the contract price had been apportioned
to particular phases of work in the development of the
software which were the milestones. Table 8.1 had two purposes,
first to prescribe planned contract Acceptance Dates for
the Project deliverables and secondly to provide a Payment
Plan under the Head and Sub-contracts.

Finn J rejected the submission that an entitlement to
payment in favour of GEC Marconi did not arise until Milestone
5000; its entitlement to payment arose when it reached
each milestone.

Until the software was delivered at Milestone 5000 there
was nothing of value to the Commonwealth. What was delivered
at each preceding milestone to 5000 were documents. Some
80% of the value of the contract was paid prior to Milestone
5000. This was not a case where if some work had started
it could be picked up and completed by another person.
Software is not like a building you can see, touch and
construct.

Implications for contracting

In light of this decision specific clauses that provide
the protection of the entire obligation concept will need
to be embodied in software and systems development contracts.

If a contract or obligation is to be found to be entire,
notwithstanding that the contract or obligation provides
for payment by instalments, the contract on its proper
construction must indicate that the instalments are nonetheless
conditional upon complete performance of the contract or
obligation; that is, the payments are refundable if completion
does not occur because of the default of the party rendering
performance.

The Legal Effect of Variation Agreements

The Commonwealth brought a cross-claim against BHP IT
for the losses it incurred as a result of not having the
benefit of the ADCNET software.

Its losses principally concerned:

  • the cost of having to maintain and relocate the old
    security gateway system;
  • the cost of having to accelerate the development of
    part of the ADCNET software to allow the IBM Classified
    System to be switched off;
  • the cost of further project management services for
    the December 1997 Variation Agreement – as it turned
    out, the Commonwealth ought to have claimed the expenditure
    it wasted in performing the Head Contract prior to entry
    into the December 1997 Variation Agreement; and
  • the cost of accommodation for BHP IT's project
    team in performing the December 1997 Variation Agreement – but
    should have claimed the cost of wasted expenditure in
    providing accommodation for the BHP IT project team before
    the December 1997 Variation Agreement was entered into.

There were two main findings by Finn J that made a deep
cut in the Commonwealth's damages claim. These were
a finding concerning the legal effect of the December 1997
Variation Agreement and a factual finding concerning DFAT's
inability to make decisions, in Finn J's view, expeditiously.
It is the first of these matters that we are concerned
with in this Briefing.

The effect of the December 1997 Variation Agreement

After GEC Marconi had repudiated the Sub-contract in December
1996, the Commonwealth and BHP IT entered into discussions
as to the best way to complete the Head Contract and provide
for the delivery of the ADCNET software. These negotiations
culminated in the December 1997 Variation Agreement.

Under
the terms of the Head Contract the Canberra based system
was to have been delivered by February 1996. The
balance of the ADCNET software was to have been delivered
by the end of May 1996, at which time the contract would
have been completed.

The Commonwealth, in effect, set new
contractual milestone dates for the development of the
ADCNET software. Both
BHP IT and the Commonwealth accepted that the work that
GEC Marconi had undertaken under the Sub-contract was of
little or no value and that to develop the ADCNET software,
such work would have to start from scratch.

BHP (the parent
company) had given both financial and performance guarantees
for the performance of the Head Contract in
favour of the Commonwealth. As part of the December 1997
Variation Agreement terms, the Commonwealth agreed not
to take any action under those guarantees for defaults
that had occurred to date.

The terms of the variation agreement

The material terms
of the December 1997 Variation Agreement were:

2. Effect
This Amendment will take effect from 19 December
1997.

4. Reservation of Rights
4.1 The Commonwealth and BHPIT both reserve any rights
that they may have under the original contract in relation
to any claim that EASAMS, BHPIT or the Commonwealth may
bring against the other. In particular, the Commonwealth
and BHPIT agree that except as specifically provided for
in this Amendment they have not waived any claim against
each other.

5. Release from Further Work
The Commonwealth hereby release BHPIT from any further
obligation to perform the work as required under the original
contract.

6. Work still to be Performed
The Parties agree that BHPIT will perform the work under
the Agreement as amended.

7. Undertaking by The Broken Hill
Proprietary Company Limited
The Commonwealth agrees that it will not take any action
in respect of the original contract against The Broken
Hill Proprietary Company Limited (BHP).

8. Liquidated Damages
The Commonwealth waives all rights to liquidated damages
under the original contract.

12. Excusable Delay
BHPIT agrees to waive all claims against the Commonwealth
under the original contract for delay costs except those
that are found by a court or as a result of arbitration
or mediation to which the Commonwealth is a party to have
arisen from a claim by EASAMS on BHPIT and to have been
the direct result of an action or omission of the Commonwealth.

BHP
IT's Arguments against the Commonwealth's
cross claim

There were four principal arguments advanced
to defeat the Commonwealth's cross claim:

  • BHP IT
    argued that Clause 5 operated retrospectively to
    release BHP IT
    entirely from its obligations under the Head Contract – once released
    any right to damages that the Commonwealth had for delay in the delivery
    of the ADCNET
    software was extinguished.
  • Alternatively, the Commonwealth by entering into the
    December 1997 Variation Agreement effectively limited its right of recovery for delay in the delivery
    of the ADCNET software to the date of effect of that agreement.
  • BHP IT in addition
    argued that Clause 8 of the December 1997 Variation
    Agreement extinguished any rights the Commonwealth had
    to claim for
    delay – the
    Clause 8 argument.
  • GEC Marconi argued that the changes made between the
    Sub-contract and the December 1997 Variation Agreement
    were so substantial
    and significant that
    a completely different obligation was imposed by the later agreement, thereby
    rescinding from the outset the Sub-contract, or at least from the date
    the December 1997 Variation Agreement was entered into.

The Commonwealth's
response

The Commonwealth said that:

  • BHP IT had failed to deliver
    the developed software at the times required by the
    Head Contract;
  • despite this failure, it had not terminated the
    Head Contract; and
  • accordingly, BHP IT's obligation
    to deliver the ADCNET software remained.

The December 1997
Variation Agreement was not a new agreement but a variation
of the Head Contract.

Consequently the Commonwealth was
entitled to sue for any damage suffered as a result of
the late delivery
of the
ADCNET software: Carr v J A Berriman Pty Ltd (1953)
89 CLR 327. This was the position at the time the
December
1997 Variation Agreement was entered into. This right
remained unaffected by the December 1997 Variation
Agreement
and
was specifically preserved by Clause 4.1 of that
agreement. All that the December 1997 Variation Agreement
relevantly
did was fix a new date for delivery of the ADCNET
software.

In respect of the Clause 8 argument put
forward by BHP IT the Commonwealth said that although Clause
39.8 of
the Head Contract was headed 'Liquidated Damages',
it dealt with two distinct rights – the Commonwealth's
right to liquidated damages and the right to general
damages for delay. The Commonwealth under Clause
39.8 had to elect
which right it would pursue. The wording of Clause
39.8 was such that the conditions of the exercise
of one right
precluded resort to the other right. There is some
authority which suggests that pursuit of a right
to liquidated damages
forecloses a party's right to general damages
for delay. The High Court has recognised this issue
but has
left it undecided: see AMEV-UDC Finance v Austin (1986) 162 CLR 170).

Finn J found that what was preserved by Clause 4.1 was
only the existing right and not the right to future damages
occasioned by the continuing delay in the delivery of the
ADCNET software.

Relevant legal principles

Finn J sets out the relevant
legal principles that govern the effect of a contract of
variation at [1424]:

The principles governing the effect
a contract of variation may have on the contract it varies
are settled, even if they do some violence to "strict
logic":
Tallerman & Co Pty Ltd v Nathan's Merchandise
(Victoria) Pty Ltd (1957) 98 CLR 93 at 135; Wilken and
Villiers, Waiver, Variation and Estoppel, paras 2.26-2.36.
The variation contract may effect (i) a complete discharge
of the original contract and the substitution of a new
contract in its stead; (ii) a partial discharge of the
original contract with or without new terms for those discharged;
or (iii) the
addition of new terms without any partial discharge. The
determining factor is the intention of the parties as disclosed
in the variation agreement: Tallerman & Co Pty Ltd,
above, at 145; Federal Commissioner of Taxation v Sara
Lee Household & Body Care (Aust) Pty Ltd (2000) 172
ALR 346; Concut Pty Ltd v Worrell, above, at 698-699.

Finn
J's reasoning

Finn J accepted the Commonwealth's
argument that Clause 8 of the December 1997 Variation Agreement
which
took away the Commonwealth's right to claim liquidated
damages did not affect the Commonwealth's right to
general damages as set out in Clause 39.8 of the Head Contract.
He accordingly rejected BHP IT's Clause 8 argument.

Finn J accepted the Commonwealth's submission that
the December 1997 Variation Agreement was a variation of
the Head Contract, and not in itself a complete substitution
for the Head Contract.

More problematic for him, and unfortunately
the Commonwealth, was what effect should be ascribed to
the variations to the Head Contract brought about by the
December 1997 Variation Agreement.

Finn J
rejected BHP IT's primary submission which
revolved around Clause 5 of the December 1997 Variation
Agreement. The entry into this agreement did not extinguish
the Commonwealth's existing right to damages for
delay. This right was preserved by Clause 4.1 of the December
1997 Variation Agreement.

Unfortunately for the Commonwealth,
Finn J found that what was preserved by Clause 4.1 was
only the existing right
and not the right to future damages occasioned by the continuing
delay in the delivery of the ADCNET software.

Finn J found
that it was against the commercial reality of the situation
that such a right should continue to exist.
The December 1997 Variation Agreement was the means by
which the ADCNET software was to be provided after GEC
Marconi had wrongfully repudiated the contract. Finn J
thought that it seemed commercially nonsensical that the
parties
would start afresh, preserve their existing rights and
get on with the job at hand, but at the same time know
that every moment was sounding in damages against one of
them.

Tips for Agencies

  • In a procurement contract, don't
    forget that the Commonwealth can be held accountable for
    its part of the bargain – agencies should carefully
    consider whether it is possible or appropriate for the Commonwealth to take
    on and satisfy any commitments provided for in a contract.
  • Ensure that you have contractual arrangements in place
    with a supplier or other party before agreeing to any
    obligations or consider having the contractor
    purchase directly from the supplier.
  • Don't forget that everyday interactions
    with contractors can result in variations to the contract even if they
    are not formally documented as such.
  • When you do vary a contract, particularly
    where delay is involved, consider carefully how you
    envisage that this will impact on any right to damages
    including damages that would otherwise have been applicable for the period
    after
    the variation
    is signed.
  • If you are making instalment or milestone payments
    but expect to recover these if the end product is not
    delivered,
    make
    sure that the contract is
    absolutely clear on this point – you can't rely on annotations
    against a milestone schedule or the mere fact of a performance guarantee to
    have this
    effect if the
    contract is not clear.

Contact for further information:

Ravi Vivekananda
Senior Executive Lawyer

Tel: (02) 6253 7429
Fax: (02) 6253 7383
E-Mail: ravi.vivekananda@ags.gov.au

Tara McNeilly
Senior Lawyer

Tel: (02) 6253 7421
Fax: (02) 6253 7381
E-Mail: tara.mcneilly@ags.gov.au

For further information on commercial law matters and services
please contact:

National
John Scala

(03) 9242 1321

Canberra
Harry Dunstall
John Snell

(02) 6253 7066
(02) 6253 7025

New South Wales
Linda Vogel
John Berg

(02) 9581 7720
(02) 9581 7624

Victoria
Paul Lang
Cathy Reid

(03) 9242 1322
(03) 9242 1203

Queensland
Robert Claybourn

(07) 3360 5767

Western Australia
Lee-Sai Choo

(08) 9268 1137

South Australia
David Williams

(08) 8205 4283

Northern Territory
Ashley Heath

(08) 8943 1444

Tasmania
Peter Bowen

(03) 6220 5474

ISSN 1443-9549 (Print)
ISSN 2204-6550 (Online)

For assistance with supply of copies, change of address
details etc please Tel: (02) 6253 7052, Fax: (02) 6253
7313, E-mail: ags@ags.gov.au

The material in these notes is provided for general
information only and should not be relied upon for the
purpose of a particular matter. Please contact AGS before
any action or decision is taken on the basis of any of
the material in these notes.

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