CASE NOTES

GOOD FAITH OBLIGATIONS AND ASSESSMENT OF DAMAGES FOR BREACH OF CONTRACT Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd ((2003) 196 ALR 257) Damages ­ breach of contract ­ proof of damage ­ calculation of damages ­ joint venture mining contract ­ respondent inflated cost estimates ­ duty of good faith in contract ­ continuing obligation during litigation to correct fraudulent conduct Andrew Komesaroff* and Maria Pawelek** INTRODUCTION On 26 March 2003 the High Court of Australia allowed an appeal by Placer (Granny Smith) Pty Ltd ("Placer") to set aside an order of the Full Court of the Supreme Court of Western Australia. The appeal to the High Court related solely to the issue of proof of damage. However, due to the relevance of the good faith obligation issue considered at first instance, this summary has been extended to cover previous decisions. BACKGROUND FACTS The contractor, Thiess Contractors Pty Ltd ("Thiess"), and Placer were parties to a schedule-ofrates contract for the open-cut mining of the Granny Smith mine in Western Australia. Placer was the operating company for the Granny Smith joint venture in which it had a 60% interest. The contract was for a fixed term ending 31 December 1992. However, towards the end of this period Placer became dissatisfied with the way in which the contract enabled unexpected work variations to earn Thiess windfall profits. Consequently, in 1991, Placer suggested the parties enter into a new `partnering' contract and Thiess eventually agreed. The new contract required Thiess to adopt an "open book" approach and reveal to Placer confidential data about the way in which Thiess would derive its rates for carrying out various aspects of the work under the new schedule of rates contract. Those rates were to be based upon genuine estimates by Thiess, being Thiess' "internal rates charged by the plant department" having regard to historical data. The contract provided for the recovery by Thiess of a margin of 5% on the estimates. Any gains or losses by reason of productivity improvements or shortfalls were to be brought to account following monthly reviews under the contract. Accordingly, Thiess could retain the benefit of any productivity gains, or suffer a detriment for productivity shortfalls, until a new rate based upon actual costs, was adopted following a monthly review. The contract contained a "good faith" provision stating that:

* Partner, Corrs Chambers Westgarth (Melbourne).

** Solicitor, Corrs Chambers Westgarth (Melbourne).


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"the successful operation of this contract requires that [the parties] agree to act in good faith in all matters relating to the carrying out of the works, derivation of rates and interpretation of this document..." Thiess also conducted operations at Placer's Keringal mine which the parties envisaged would in future be converted into a partnering-type project. However, the conversion did not take place because Placer became dissatisfied with Thiess' work on the Granny Smith mine. Moreover, in a tender process to undertake work at the Sunrise mine (another of Placer's mines), Placer and its joint venture partner Delta Gold NL realised that the Thiess bid was much higher than market rates. Placer informed Thiess of its intention to seek tenders for the outstanding work at the Granny Smith, Keringal and Sunrise mines. Thiess was asked to submit a tender, which it did under protest. Placer's evaluation revealed that the costs of continuing the existing Granny Smith and Keringal contracts with Thiess, and entering a new contract for Sunrise, would be substantially higher than Thiess' tender bid, and higher than a combination of work by Placer and other contractors. Consequently, Placer exercised its contractual right to terminate the Granny Smith contract. The litigation was commenced by Thiess in response to a notice of termination given by Placer to Thiess on 15 March 1995. In the action, Thiess contended that Placer was not entitled to terminate the Granny Smith contract unless, or until, Thiess ceased mining. Thiess claimed that if the true construction of both the Granny Smith and Keringal contracts were not to that effect, these contracts should be rectified. It further contended that the notice of termination was given in breach of Placer's obligation to act in good faith in fulfilment of its contractual obligations. Thiess claimed damages for the loss of profits it would have earned had the Granny Smith contract not been terminated. Thiess also claimed damages for the loss of the opportunity to enter into a contract with Placer to mine the Sunrise mine. Additional claims were made for breach of fiduciary duty, and misleading and deceptive conduct. In its defence, Placer maintained that it had an unqualified right to terminate the contract but that in any event it had cause for termination. Although it was unaware of the material facts when it served the termination notice, Placer claimed to have learned subsequently (from material disclosed on discovery) that Thiess had made material and fraudulent misrepresentations, or at least negligent misrepresentations, which induced Placer to enter into the Granny Smith contract. The core of Placer's contentions was that Thiess, when bound to act in good faith in deriving rates to be charged and, thus, bound to disclose its actual bona fide estimates of costs to carry out the works, had deliberately inflated these costs resulting in Placer being overcharged. Placer counterclaimed for damages for breach of contract, fraud, negligence, misleading and deceptive conduct and breach of fiduciary duty. ISSUES The main issues which required determination at first instance, were: (a) the application of the "good faith" provision (both in the context of determining if Thiess had breached the Granny Smith contract by failing to act honestly and Placer being estopped from terminating the contract until after mining had ceased); and (b) the quantum of damages to be awarded to Placer for Thiess' deceit and breach of contract. Below is a summary of the findings of the courts at each instance in relation to the good faith provision issue and calculation of damages issue.


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GOOD FAITH OBLIGATION First Instance Decision1 Templeman J held that Placer was induced to enter into the Granny Smith contract by a deceitful misrepresentation by Thiess that it would charge its estimated operating costs to which a profit margin of 5% would be added. The trial judge found Thiess had inflated its estimated operating costs with a view to deriving a profit of 8.7% on its costs. He held that Placer was entitled to damages for deceit, but said only nominal damages should be awarded in respect of the deceit because Placer had not proved how much worse off it was, as a result of entering into the contract, than it would have been had it pursued its other option of owner-mining. Templeman J went on to consider the "good faith" provision and stated it "clearly requires goodwill and co-operation on the part of both parties"2. Further, he said the obligation of good faith requires "the parties to act honestly with each other and to take reasonable steps to co-operate in relation to matters where the contract does not define rights and obligations or provide any mechanisms for the resolution of disputes"3. Templeman J concluded that the Granny Smith contract imposed on Thiess the obligation of formulating, in good faith, equipment operating costs based on historical data. This obligation was held to be in the nature of a fiduciary obligation. Consequently, Thiess was in breach of the contract because it inflated its operating costs based on historical data for the purpose of deriving additional profit and this was a breach of the good faith obligation. Placer was awarded damages for breach of contract. While his Honour held the "good faith" obligation applied to rate reviews, he was not persuaded it had any application to the termination provisions. His Honour held the "good faith" obligations did not extend to the termination clause on two bases. First, the "good faith" obligation was concerned with the successful operation of the contract and not its termination. Secondly, the termination clause provided Placer "with an absolute and uncontrolled discretion" whether or not it would terminate the contract which Placer was "entitled to exercise for any reason" relieving Placer "from any obligation to have regard to Thiess' interest"4. Templeman J concluded that the termination clauses contained in the Granny Smith and Keringal contracts gave Placer an unfettered right of termination and Placer's exercise of that right involved no breach of contract. In any event, Placer exercised its rights of termination honestly and in good faith. The trial judge held Placer had cause to terminate both contracts because of Thiess' deceit (and breach of contract, in the case of Granny Smith) although Placer was not then aware of material facts at the time of termination. Thiess appealed to the Full Court of the Supreme Court of Western Australia both against the dismissal of its claim that Placer had wrongfully terminated the Granny Smith contract, and against the judgment it had suffered on Placer's counterclaim. The appeal against a dismissal of the claim for wrongful termination of the contract failed. However, Thiess succeeded in its appeal against the judgment entered on the counterclaim.

1 2 3 4 (2000) 16 BCL 130. (2000) 16 BCL 130 at 170. (2000) 16 BCL 130 at 170. (2000) 16 BCL 130 at 171.


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Full Court Appeal5 In a unanimous decision, the Full Court rejected Thiess' contention that Placer, prior to entering the Granny Smith contract, represented that it would only rely on the termination clause if the mine was closed or uneconomic to work. The Full Court noted there were several provisions in the contract itself which indicated the parties intended that mining be carried on by Thiess for the life of the mine but that this intention was always subject to the termination clause. The Full Court also said the representation Placer had made (that it could not see any situation in which Placer would need to invoke the termination clause) had to be considered in the context of Placer refusing to remove the termination clause during the contract negotiations (despite requests by Thiess). This was seen by the Full Court as a reservation of the termination right and not a representation that the contract would not be terminated. The Full Court was not required to consider whether the "good faith" provision applied to the termination clause as this issue was not the subject of the appeal. The Full Court said the scheme of the contract as a whole and the obligation of good faith contained in the "good faith" provision required Thiess at "each rate review to disclose all facts relevant to the establishment of rates based on actual costs"6. The Full Court held the misrepresentations of the kind alleged, made after the contract had been entered into, constituted breaches of the "good faith" provision. The Full Court held, contrary to the contention of Thiess, that the contract obliged Thiess to provide Placer with a genuine estimate of its costs and that, in consequence of Thiess' breaches of contract, Placer paid remuneration based on rates higher than those that would otherwise have been agreed. High Court Placer was granted special leave to appeal to the High Court. The central issue in the High Court appeal was whether the Full Court was right to conclude that Placer had failed to prove the damages it had sustained as a result of Thiess' now undisputed breach of contract. The good faith provision was not an issue in the High Court appeal. However, Callinan J noted that the contractual obligation to act in good faith "in all matters" should not be regarded as discharged on the commencement of proceedings or suspended during them. ASSESSMENT OF DAMAGES First Instance Decision At trial, Placer sought to arrive at the amount it had overpaid as a result of Thiess' breach, by deducting from the amount of money which it had paid the amount of profit that Thiess actually made in performing the contract during the relevant period. However, Placer's calculation of its damages at trial took 5% of actual rather than estimated costs as specified in the contract. Placer used the 5% of actual costs to calculate the amount it overpaid. Further, in its calculations, Placer relied on project forecast and contract valuation reports ("Reports") which Thiess staff produced each month.

5 6 (2000) 16 BCL 255. (2000) 16 BCL 255 at 260.


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At trial, however, Thiess sought to suggest that the forecasts made in its Reports might not have been accurate or reliable. For that reason, Templeman J concluded that the profits recorded in the Reports, prepared for use within Thiess, could not be "relied on (without adjustment) as providing an accurate assessment of the profit Thiess expected to earn from the new contract alone"7. Templeman J held the profit of $8.465 million exceeded 5% of actual costs ($3.112 million) by $5.353 million and that there was some increase in productivity, but that it was not significant. Nonetheless, he allowed $500,000 on account of productivity increases in response to submissions made by Thiess. Thiess had submitted that its estimated costs of the work to be done were higher than the actual costs it incurred. Actual costs were lower than estimates because of productivity gains it had made. Accordingly, having allowed for increases in productivity, Templeman J assessed Placer's damages at $4.853 million. Full Court Appeal The Full Court held that the method adopted by Templeman J for calculation of damages was flawed and was not a method that had been pleaded or propounded by either party at trial. It further held that the method of calculation advanced by Placer at trial not only had failed, but was bound to fail, to provide an accurate measure of what had been lost. The Full Court was of the view that no argument as to method of assessment would have arisen had Placer proved its damages in accordance with the formula the Full Court set out in its judgment. The Full Court also considered whether, even assuming that the method used by the trial judge was permissible in principle, it took into account all relevant sources of profit. It drew attention to the fact that the reliability of the approach of Templeman J was entirely dependent on there being only three sources from which Thiess could earn profits under the contract (these being the agreed 5% allocation, cost underruns and productivity gains which the trial judge had taken into account). The Full Court formed the view that profits could also have been derived from efficiencies (other than productivity) in areas such as site costs but that no finding had been made in regard to whether such efficiencies had been achieved. In the circumstances, the Full Court was of the opinion that the method adopted by the trial judge did not adequately take into account the potential for efficiencies and other productivity gains. The Full Court placed much significance on their finding that the method of assessment of damages by Templeman J was not pleaded by Placer as the basis of its claim for damages, was not advanced by Thiess in any way as being applicable to Placer's claim, no witness suggested that it would be utilised in regard to Placer's claim and it had not been propounded by either Thiess or Placer in the course of closing addresses. The Full Court, therefore, held that Placer had not proved its damages but refused to order a retrial. The judgment entered on the counterclaim was set aside and it was ordered that Placer have judgment for the nominal sum of $100. The High Court Appeal The appeal was heard by Gleeson CJ, McHugh, Kirby, Hayne and Callinan JJ.

7 (2000) 16 BCL 130 at 168.


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At the outset, Gleeson CJ, McHugh and Kirby JJ noted there was an admission by Thiess on the pleadings that for a particular period of time the difference between its internal plant department rates and the amount it charged Placer was $2,713,930. On that basis alone, the judges held Placer was entitled to substantial not nominal damages. They concurred with the judgment and orders made of Hayne J. In his reasoning, Hayne J also noted the admission and stated that, in the appeal, the attention of the Full Court was not drawn to this admission. Hayne J did not accept that the method of assessment which the trial judge adopted was not open to him, or differed in any fundamental way from the case which was foreshadowed by Placer's pleadings. His Honour held that the Full Court's reference to an absence of an intention of Thiess to make an admission revealed an error underlying that part of the Full Court's reasoning and that it suggested that the Full Court considered that Placer had to negative any and every possible explanation to Thiess' profit exceeding 5% of its actual costs before it could demonstrate that, more probably than not, it had suffered damage in the amount which its calculations revealed. Hayne J was of the view that Placer undoubtedly bore the burden of proving not only that it had suffered damage as a result of Thiess' breach of contract, but also the amount of the loss it sustained. However, his Honour held Placer had to prove these matters on the balance of probabilities and with as much precision as the subject matter reasonably permitted. His Honour also held that in some cases where the plaintiff cannot adduce evidence it may be necessary or desirable for estimation or guesswork to be allowed in assessing the damages. In his view, once Placer demonstrated that Thiess' estimated costs closely approximated its actual costs, it was for Thiess to show why some further adjustment of the figures was necessary. Hayne J concluded that it was not enough for Thiess to answer Placer's evidence by saying that there might have been some other unidentified reason for its profit being as large as it was, or by pointing to the possibility of adopting some other method of assessing Placer's damages. In relation to the issue of assessment of damages generally, Callinan J held that very often one method of calculation of damages may not necessarily provide the exclusive means of doing so. In his view the method suggested by the Full Court was not the only method available. On this point His Honour referred to the decision of Gibbs CJ in Gould v Vaggelas8, and stated that, although that case related to damages for deceit, the comments and examples used stating that the rules in relation to assessment of damages are not inflexible are relevant. His Honour went on to comment that, in assessing damages, a court does the best it can. A judge relies on predictions and probabilities and that precision will rarely be possible with respect to future costs and profits, particularly when deceit by one party obscures the true position. His Honour concluded that, if there were other areas in the contract which could have allowed Thiess to make profits over and above those taken into account by the trial judge, it was for Thiess to prove these with as much precision as it could. Further, whether and the extent to which, Thiess was entitled to damages or to claim a set off was a matter for it to make out.

8 (1985) 157 CLR 215 at 220-223.


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Callinan J held that the onus lies upon the party seeking the reduction to establish that reduction. In this regard, his Honour referred to Watts v Rake9, by analogy, in which it was held it was for the tortfeasor to identify damage for which it was not responsible. The High Court concluded the decision of the Full Court could not stand and reinstated the decision of the trial judge including the damages quantum of damages assessed. CONCLUSION The decisions in this case have been very useful in terms of explaining the current attitude of the courts in Australia towards both good faith clauses in contracts and assessment of damages for their breach. The first instance decision is authority for the proposition that contracts which contain good faith clauses are valid and will be recognised by the law as functional and effective. Further, a good faith clause will be enforceable even where it is drafted in a way which gives it a wide ambit. However, a good faith clause will not operate to fetter clear rights (such as the right to terminate) that are set out in the contract. Importantly, Templeman J went on to set out that the concept of 'good faith' actually consists of, amongst other things, the following: (a) goodwill on the part of both parties; (b) reasonable cooperation on the part of both parties; and (c) an obligation on the parties to deal and act honestly with each other. Although not specifically affirmed at Full Court and High Court level, these findings were not disputed or set aside. At the High Court level, Callinan J did elaborate on the issue of good faith obligations by saying that they should not be regarded as discharged on the commencement of proceedings or suspended during them. In respect of assessment of damages, the decision of the High Court has made it clear that it may be necessary for the courts to use estimation or guesswork in assessing damages where the plaintiff cannot prove precisely what it has lost and that there is not only one formula by which damages must be calculated. Further, while it is for the plaintiff to prove the damages it has suffered by virtue of a breach of contract, the onus is on the defendant to establish any reduction in these damages that should be made.

9 (1960) 108 CLR 158.