Forestry Commission (NSW) v Stefanetto
133 CLR 5078 ALR 297
(Judgment by: Barwick CJ)
Between: Forestry Commission (NSW)
And: Stefanetto
Judges:
Barwick CJMason J
Jacobs J
Subject References:
Contract
Judgment date: 19 February 1976
Sydney
Judgment by:
Barwick CJ
The general conditions of contract incorporated into a road construction contract between the appellant Commission and respondent contain the following clauses relevant to the resolution of this appeal:
"35.5. LIQUIDATED DAMAGES FOR DELAY IN COMPLETION.
If the Contractor fails to complete the Works or a separable part of the Works, as the case may be, within the relevant time referred to in sub-cl. 35.2, or within any extended time granted or allowed pursuant to sub-cl. 35.4, the Contractor shall pay to the Principal by way of pre-estimated and liquidated damages and not as a penalty the amount or amounts stated or referred to in the Annexure hereto for every week and part of a week that shall lapse after that time or the extended time until the whole of the Works or the separable part of the Works, as the case may be, has been completed and that amount or those amounts may be deducted from any moneys which may then be or thereafter become payable to the Contractor by the Principal, including any retention moneys then held by the Principal, and, if such moneys are insufficient for this purpose, then from the Contractor's security under the Contract, and any deficiency then remaining may be recovered by the Principal as a debt due to the Principal by the Contractor. Where the Principal has used or occupied any part of the Works pursuant to sub-cl. 35.3, the amount of pre-estimated and liquidated damages payable by the Contractor to the Principal by virtue of this subclause may be reduced to an amount determined by the Superintendent and notified by him to the Contractor.
43.1. PROCEDURE ON DEFAULT OF CONTRACTOR.
If the Contractor defaults in the performance or observance of any covenant, condition or stipulation in the Contract or refuses or neglects to comply with any direction as defined in cl. 23 but being one which either the Principal or the Superintendent is empowered to give, make, issue or serve under the Contract and which is issued or given to or served or made upon the Contractor by the Principal in writing or by the Superintendent in accordance with cl. 23, the Principal may suspend payment under the Contract and may call upon the Contractor, by notice in writing, to show cause why the powers hereinafter contained in this clause should not be exercised. The notice in writing shall state that it is a notice under the provisions of this clause and shall specify the default, refusal or neglect on the part of the Contractor upon which it is based. If the Contractor fails, within the period to be specified in the notice in writing, to show cause which in the opinion of the Principal offers reasonable assurance that the default will be remedied or such direction of the Principal or the Superintendent, as the case may be, will be complied with and the Contract satisfactorily completed, the Principal, without prejudice to any other rights that he may have under the Contract against the Contractor, may -
- (a)
- take over the whole or any part of the work remaining to be completed and for that purpose and insofar as it may be necessary exclude from the site the Contractor and any other person concerned in the performance of the Works; or
- (b)
- cancel the Contract, and in that case exercise any of the powers of exclusion conferred by sub-par. (a) of this paragraph. If the Contractor notifies the Superintendent in writing that he is unable or unwilling to complete the Works, or to remedy the default, refusal or neglect stated in the notice in writing referred to in the first paragraph of this subclause, the Principal may act in accordance with the provisions of sub-par. (a) or sub-par. (b) of the last preceding paragraph, as he thinks fit.
43.3 ENGAGEMENT OF OTHERS.
If the Principal elects to exercise the power conferred on him by sub-par. (a) of the third paragraph of sub-cl. 43.1 he may complete the whole or any part of the work remaining to be completed and for that purpose may let a contract or contracts for the work remaining to be completed or, as the case may be, for any part of that work or may employ any person or persons other than the Contractor to carry out that work or, as the case may be, the part of that work. The Principal may take possession of and permit other persons to use any materials, Constructional Plant and other things on or about the site which are owned by the Contractor and as are requisite and necessary for the purposes of any such contract or any such employment. The Contractor shall have no right to any compensation or allowance for any action taken by the Principal pursuant to this subclause, other than a right to require the Principal to maintain in good working order the Constructional Plant referred to in the preceding paragraph. On completion of the work all Constructional Plant and the surplus of the materials and other things so taken possession of will be handed over to the Contractor, but without payment or allowances for the fair wear and tear they may have sustained in the meantime PROVIDED HOWEVER, that if there is a deficiency as referred to in sub-cl. 43.4 and if the Contractor fails to make good that deficiency, the Principal may retain in his possession the said Constructional Plant, materials and other things until the deficiency is made good pursuant to the provisions of sub-cl. 43.4.
43.4 ADJUSTMENT OF COSTS ON COMPLETION OF THE WORKS.
On completion of the Works in accordance with the Contract the Superintendent will ascertain the cost of the Works to the Principal, comprising payments to the Contractor and all losses, costs, charges and expenses incurred by the Principal in carrying out the whole or any part of the Works completed by him pursuant to sub-cl. 43.3 and any sum or sums payable or due to the Principal as liquidated damages under the Contract and he will certify such amount to the Principal. A certificate signed by the Superintendent stating the cost of the Works to the Principal shall be prima facie evidence of the matters stated in the certificate. Should the amount so certified be greater than the amount which would have been paid to the Contractor if the whole of the Works had been carried out by him, the difference between the two amounts may be deducted from any moneys which may then be or thereafter become payable to the Contractor by the Principal, including any retention moneys then held by the Principal, and, if such moneys are insufficient for this purpose, from the Contractor's security under the Contract. If the amount of such moneys together with the amount of the security be less than the amount to be deducted, the deficiency may be recovered by the Principal as a debt due to the Principal by the Contractor.
43.6. CANCELLATION OF CONTRACT.
If the Contract is cancelled under sub-cl. 43.1 or under any other provision of the Contract it shall be deemed cancelled as from the date when notice of cancellation in writing under the hand of the Principal is served upon the Contractor, or upon any Official Receiver, Trustee in Bankruptcy, Liquidator, Official or Provisional Liquidator, Official Manager, or Receiver or Receiver and Manager of the Contractor or of the business of the Contractor. On such cancellation of the Contract all or any sums of money which may be in the hands of the Principal in respect of the Contract and are not then payable to the Contractor under or pursuant to any provision of the Contract, and all or any sums lodged or retained as security for the due and proper performance of the Contract and all or any sums named in the Contract as liquidated damages which have accrued due to the Principal may be declared by the Principal to be forfeited and all such sums that are so declared to be forfeited shall be forfeited and shall be retained by or become payable to or vested in the Principal. On such cancellation of the Contract all moneys which have been previously paid to the Contractor shall be deemed to be in full satisfaction of all claims of the Contractor of any kind or description whatsoever under or in respect of the Contractor. The amount of the security is $30,000 (sub-cl. 5.2)."
The respondent made default in his performance of the contracted work. The appellant became entitled to exercise its rights under the third paragraph of cl. 43.1. It elected to take over the part of the work then remaining to be done. It did not cancel the contract.
At the time the appellant took over the work, there was on the site road-making machinery and plant brought there by the respondent in order to perform the contract. Part of this machinery and plant was the property of the respondent and part was being acquired by him under hire-purchase arrangements with the proprietor of that machinery and plant.
The appellant claimed to be entitled, by virtue of the second paragraph of cl. 43.3, to take possession and make use of all the machinery and plant which was on the site. The respondent disputed the appellant's right to take possession of or use any of such plant and machinery.
The respondent commenced proceedings in the Equity Division of the Supreme Court of New South Wales to recover possession of all the machinery and plant with certain ancillary relief to which I need not refer.
The Supreme Court (Needham J.) held that, upon the true construction of the second paragraph of cl. 43.3, the appellant was entitled to take possession only of that machinery and plant which was the property of the respondent: in other words, the Supreme Court held that the machinery and plant under hire-purchase to the respondent did not come within the expression in the clause "which are owned by the contractor". It did so, both because of the natural meaning of the word "owner" in relation to chattels, and upon a comparison of the language of this paragraph of cl. 43.3 and the language of other clauses of the contract, such as the definition of constructional plant and the terms of cl. 16.1. I have no need to set out these clauses: they are fully set out in the reasons for judgment of the Supreme Court (1975) 1 NSWLR 332.
I am of opinion that the Supreme Court was right in its construction of the expression "which are owned by the contractor". Further, I agree with the reasoning by which his Honour reached his construction of the contract. I would add nothing to his reasons.
The respondent submitted that the second, third and fourth paragraphs of cl. 43.3, in giving the appellant the right to take possession of and use the machinery and plant owned by the respondent without payment or any responsibility to make allowances for fair wear and tear, and to retain such possession till any moneys ultimately due by the respondent to the appellant had been paid, constitute a penalty against which a court of equity would grant relief. Accordingly, the respondent claimed to recover possession of his own machinery and plant, though the work may not have been completed and final accounts taken between the parties.
In a carefully expressed judgment, the Supreme Court, after consideration of a number of authorities, accepted this submission, holding that the doctrines of equity extended beyond relief against pecuniary sums, considered to be penalties as distinct from genuine pre-estimates of damage. His Honour then concluded that the contractual right to take and retain possession of and to use the respondent's machinery and plant did constitute relevantly a penalty and made orders conformable to that conclusion.
His Honour thought that the great value of machinery and plant used currently in constructional work called for a different approach to such a clause as cl. 43.3 to that which might be made if only manual tools and unmechanised machinery were used. His Honour considered that it was material in deciding the relevant nature of cl. 43.3 that the contract provided a sum of $1,000 per week or part thereof as liquidated damages for delay on the part of the respondent in the completion of the work (see cl.35.5) and a substantial sum by way of security for the performance of the contract (see cl. 5.2). His Honour said (1975) 1 NSWLR, at p 344 :
"I cannot accept that a contractual right to appropriate highly expensive equipment and materials belonging to another contracting party for an indefinite period, without payment and without liability to compensate, not only for damage but also for fair wear and tear, could be anything but a penal provision aimed at ensuring that the contractor does not breach his contract."
I am unable to accept this conclusion. Being of a contrary opinion, I find no need to discuss the interesting question as to the reach of the doctrines of equity in relief against forfeitures and penalties. Whether, if cl. 43.3 were properly held to be relevantly penal in its nature, there would be jurisdiction to grant relief against its operation will remain for me an open question.
I do not think the provisions of the contract as to liquidated damages for delay in completion or as to the provision of security for the performance of the contract are relevant considerations when determining the nature of the grant of the contractual right to take possession and use the respondent contractor's machinery and plant in the completion of the work. It must be observed that the appellant is not primarily interested in obtaining damages for breach of the contract. It is primarily concerned with the completion of the work within a stipulated time. Both the provisions as to liquidated damages and as to the provision of security are means to that end, coupled with an ease of recovery of damages in the event of breach. But the possession and use of the machinery and plant are, to my mind, a direct means of achieving the purpose of the contract, namely, the completion of the work. They are not a means of providing the appellant with any form of compensation in respect of the breach of the agreement.
The clause does not give the appellant any rights of property in the machinery and plant of which it authorizes possession and use. I see a critical difference between a clause which gives absolute property rights to the person in the situation of the appellant and cl. 43.3 which limits the appellant's right to possession and use. Consequently, I would not regard Bysouth v. Shire of Blackburn and Mitcham (No. 2) (1928) VLR 562 , if generally acceptable, as an authority for the course taken by the Supreme Court.
The respondent laid emphasis upon the fact that there is to be no compensation payable to him for the use of his machinery and plant, including its wear and tear: but the appellant by the contract is to maintain the plant in good working order. No doubt the appellant, having taken possession of the respondent's machinery and plant, will be bound by the general law to use it efficiently to complete the work as expeditiously as possible and to maintain it in good working order not doing any harm or damage to the machinery and plant other than that which is entailed in fair wear and tear in its proper use.
It seems that the provision allowing the appellant to complete the work with the aid of the respondent's plant is both reasonable and in the interest of both the parties, i.e. the interest of both parties to effect early completion. True it is that the respondent is denied the immediate use of the machinery and plant: but he is in default. It is not unreasonable that the appellant should not be confined to rely only on the liquidated damages for delay or the security provided by the respondent. These are not really a substitute for completion. Clause 43.3 is not, in my opinion, in any sense a punitive clause. Therefore, whatever the stretch of the appropriate equitable doctrine, cl. 43.3 would not be within it.
In my opinion, the appeal in relation to the penalty issue should be allowed, and the Supreme Court's order varied in this respect. I would otherwise dismiss the appeal.