Tekmat Pty Limited v Dosto Pty Limited [1990] ACTSC 43; (1990) 102 FLR 240 (7 November 1990)

SUPREME COURT OF THE ACT

TEKMAT PTY. LIMITED v. DOSTO PTY. LIMITED
S.C. No. 943 of 1988
Construction of Contracts
[1990] ACTSC 43; (1990) 102 FLR 240

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Miles C.J.(1)

CATCHWORDS

Construction of Contracts - building and engineering contracts - oral agreement to construct works at agreed price - subsequent negotiations towards formal contract - whether negotiations ended in further agreement displacing or adding to original agreement - no question of principle.

Pagnan S.P.A. v. Feed Products Ltd. (1987) 2 Lloyds Law Reports 601 at p 611

Cheshire and Fifoot Law of Contract, 5th ed, chapter 1

Masters and Another v. Cameron [1954] HCA 72; (1954) 91 CLR 353

HEARING

CANBERRA
7:11:1990

Counsel for the plaintiff: Mr Oakes

Solicitors for the plaintiff: Mallesons Stephen Jaques

Counsel for the defendant: Mr Digby and Mr R. Manley

Solicitors for the defendant: Sly and Weigall

ORDER

The plaintiff's claim for declarations be dismissed.

The defendant's counterclaim be upheld.

Leave be given to the parties to bring in short minutes of orders.

DECISION

"The parties are to be regarded as masters of their contractual fate. It is their intentions which matter and to which the Court must strive to give effect." Those were the words of Bingham J. in Pagnan S.P.A. v. Feed Products Ltd. (1987) 2 Lloyds Law Reports 601 at p 611, a decision cited in the course of argument in the present case, words which were later described as "memorable" in the English Court of Appeal (at p 619). When parties to a contract are not in dispute about what it is that constitutes the agreement between them, then it is not within the province of a court to say that their agreement is constituted by something else. But what happens when each party acknowledges that there is a contractual relationship with the other party, but each has a different view about what it is that constitutes the contract or, as the Australian editors of Cheshire and Fifoot put it (Law of Contract, 5th ed, chapter 1), what are the "phenomena of agreement"?

2. In 1987-88 the plaintiff (Tekmat) built a shopping complex called Homeworld, situated in the Tuggeranong Town Centre, for the defendant (Dosto) at a price, of one sort or another, of $8.4 million. Construction was commenced and completed after lengthy negotiation and exchange of correspondence but before the parties had reduced the terms of their agreement to a formal contractual document ready to be executed on behalf of each. This method of approach was called the "fast track" system and apparently owes much to the methods adopted, both as to design and construction techniques as well as to contractual dealings, on the Parliament House project. Now that the construction of Homeworld has been completed, both parties have turned to the Court to seek declarations as to what it was that constituted the contract between them.

3. By its third amended statement of claim, Tekmat seeks a declaration that a document marked "A" and annexed to the pleading constitutes the terms of the agreement, alternatively a declaration that some only of the clauses in the document constitute terms of the agreement.

4. By its amended defence and counterclaim Dosto seeks a declaration that on or about 11 September 1987 the parties agreed that Dosto would "construct an office and shopping centre complex known as Homeworld Tuggeranong (the works) on the land more particularly described as sections 1322 and 1323 at Tuggeranong in the Australian Capital Territory for consideration to be paid by the defendant to the plaintiff in the sum of $8.4 million in accordance with the terms of that agreement".

5. The relief claimed by Tekmat in the third amended statement of claim marks a substantial shift from the relief sought in previous pleadings. The relief previously sought was for a declaration that the annexure "constitutes the agreement reached between the plaintiff and defendant for the construction by the plaintiff of the project". In other words, the claim by Tekmat was initially predicated on the premise that the agreement was one in writing, albeit not executed. The relief now sought, although requiring findings by the Court as to what constituted the agreement (the "phenomena"), is expressly directed towards having the Court determine the whole of the terms or content of the agreement. On the other hand, the relief sought by Dosto is confined to seeking from the Court a determination as to what it was that constituted the contract and Dosto seeks only the barest of findings as to what the terms of the contract were. Despite Dosto's approach to the relief it seeks, it is, in my view, impossible to consider the question of the phenomena of the agreement without also considering the question of the terms. Whether or not it is possible ultimately to come to a finding as to the phenomena without a finding as to the terms may be another matter.

6. I prefer to try to formulate the issues between the parties in my own words than to define them by narrative reference to the allegations made in the pleadings. It is claimed on behalf of Tekmat that on about 11 September 1987 there was broad agreement between the parties that Tekmat would construct the project and that the precise terms of the agreement were to be those contained in an existing document known as the "Legal and General contract" (also referred to in evidence as "GES1") except insofar as those terms in GES1 might be varied by subsequent agreement between the parties. It is further alleged on behalf of Tekmat that such variation took place at a meeting on 26 February 1988, and it is GES1 as so varied which is put forward on behalf of Tekmat, at least as its primary submission, as a record of the terms of the agreement between the parties.

7. The case presented on behalf of Dosto is that there were negotiations prior to 11 September 1987 which culminated in agreement being reached on that date to the effect expressed in the declaration sought and set out above. Dosto does not deny that there were further negotiations and that there was further correspondence after that date but denies that these culminated in any further relevant agreement or in any variation of the agreement reached on 11 September 1987. Dosto contends that the subsequent negotiations and correspondence were directed towards agreement on the terms of a formal contract, and that any consensus reached at any stage during the course of negotiations on any particular term was provisional upon agreement as to all the terms.

8. The parties are not in dispute that their contract falls within the first of the classes mentioned in Masters and Another v. Cameron [1954] HCA 72; (1954) 91 CLR 353. In the majority judgment in that case it was said as follows at p 360:-
"Where parties who have been in negotiation reach

agreement upon terms of a contractual nature and
also agree that the matter of their negotiation
shall be dealt with by a formal contract, the case
may belong to any of three classes. It may be one
in which the parties have reached finality in
arranging all the terms of their bargain and intend to be
immediately bound to the performance of those terms,
but at the same time propose to have the terms
restated in a form which will be fuller or more
precise but not different in effect. Or, secondly,
it may be a case in which the parties have
completely agreed upon all the terms of their
bargain and intend no departure from or addition to
that which their agreed terms express or imply, but
nevertheless have made performance of one or more of
the terms conditional upon the execution of a formal
document. Or, thirdly, the case may be one in which
the intention of the parties is not to make a
concluded bargain at all, unless and until they
execute a formal contract.
In each of the first two cases there is a binding
contract: in the first case a contract binding the
parties at once to perform the agreed terms whether
the contemplated formal document comes into
existence or not, and to join (if they have so
agreed) in settling and executing the formal
document; and in the second case a contract binding
the parties to join in bringing the formal contract
into existence and then to carry it into execution.
Of these two cases the first is the more common."

9. It is necessary to review the evidence relating to the course of negotiations and to make findings on it. In this regard oral evidence was given on behalf of both parties. There was little conflict on that evidence, having regard to the admitted lack of memory on the part of some of the witnesses.

10. A good deal of the factual background is not in dispute. Between June and September 1987 there were lengthy negotiations between the parties in relation to the project. Documentation relating to design and construction was supplied by Tekmat and there was discussion about price between Mr Shaw representing Tekmat and Mr Koundouris representing Dosto.

11. I think that it is necessary to refer to only some of the correspondence and oral evidence relating to the background and negotiations. The defendant supplied the plaintiff with drawings, specifications and other documents relating to the nature of the project. There was no question by the end of August 1987 about what it was that was to be constructed.

12. In a letter of 28 August 1987 Mr Shaw proposed to Mr Koundouris the use of "Lump Sum Contract Edition 5b" published by the Master Builders Association and the Royal Institute of Architects, and a copy of that document was attached to the letter. The fact that the copy was attached suggests, in my view, that the document had not previously passed between the parties. The letter set out details of a revised price amounting to $8,441,924.00. The letter concluded,

"We trust the above is satisfactory and look forward
to receiving your acceptance of this proposal."

13. In the letter of reply of Mr Koundouris dated 31 August 1987, the commencing paragraph stated:

".....it is our intention to enter into a contract
for the construction of the above project generally
in accordance with all documentation issued to date
and generally in accordance with the items listed in
your letter, for the "Guaranteed Fixed Maximum
Price" of $8,400,000 (Eight million, four hundred
thousand dollars)."

The letter went on to refer to the items in Mr Shaw's letter of 28 August 1987 which needed "to be resolved prior to drafting of the contract". Included in those items was,

"(n) Type of contract to be discussed."

The letter of 31 August 1987 also set out in four further items numbered 1 to 4 details of what work was to be included in the price. The letter concluded as follows:-

"On resolution of the items listed above and your
acceptance of Items 1 to 4, the contract can be
prepared. Please note that this letter forms part
of our negotiations and that no legal obligations
are to arise between us until formal contracts have
been exchanged unless we both agree otherwise by our
words or actions."

14. Mr Koundouris said in evidence that in the negotiations between himself and Mr Shaw it was agreed that the work would be done for a "guaranteed maximum price". The evidence of Mr Shaw was to similar effect, but he added that "it was a guaranteed maximum price lump sum contract". The account of Mr Koundouris is consistent with the brochure issued by Tekmat entitled "How we do business" (exhibit AEDK1), which had passed from Tekmat to Dosto in June or July 1987 (see affidavit of Mr Koundouris sworn 12 August 1988 para 4).

15. Mr Shaw stated in his evidence that agreement had been reached on 31 August 1987 and merely confirmed at a subsequent meeting on 11 September 1987. In his affidavit sworn 29 July 1988 he stated in para 6 that agreement was reached on 11 September 1987. The difference may be the result of indecision rather than inconsistency but it does not boost confidence in the account given by Mr Shaw of what happened on 11 September 1987. The case presented on behalf of Tekmat was not that there had been an offer and acceptance prior to 11 September 1987, and the evidence does not lead me to a conclusion to that effect. In particular, the letter of Mr Koundouris of 31 August 1987 did not, in my view, constitute an acceptance of an offer previously made by Tekmat.

16. Present at the meeting on 11 September 1987 were Mr Koundouris and his solicitor, Mr Williams, on the one hand and Mr Shaw on the other hand. I find that Mr Topfer, the solicitor who acted for Tekmat, was not present. Mr Williams had acted for another building proprietor, referred to in evidence as Legal and General, in the concluding of a contract with Tekmat for construction of a building in Barry Drive, Canberra. Mr Topfer had acted for Tekmat in that matter, at least in the latter stages when that contract was being drawn up. In my view, it is clear that the use of the Legal and General contract was a subject which was discussed during the meeting on 11 September. Mr Shaw claimed in his first affidavit sworn 29 July 1988, that it was Mr Koundouris who proposed the use of the Legal and General contract as a basic document for the purpose of recording the agreement between Tekmat and Dosto. In his later affidavit sworn 3 September 1990, Mr Shaw was more explicit and claimed there that it was Mr Williams who raised the possibility of using the Legal and General contract as a basic document. On the other hand, Mr Koundouris does not remember anyone making reference to the Legal and General contract at the meeting on 11 September. Mr Shaw claims further that he explained some of the provisions of the Legal and General contract to Mr Koundouris who replied, "Fine". Mr Koundouris denies that he said anything to that effect. I accept the evidence of Mr Koundouris on that aspect.

17. Mr Williams made no claim to remember attending the meeting on 11 September. The lack of memory is, in my view, of significance in itself. Mr Williams otherwise had what appeared to be a very good recollection of relevant events and transactions occurring after 11 September 1987, particularly meetings on 3 November 1987 and 26 February 1988. I think it quite unlikely that Mr Williams would have proposed that the Legal and General contract document should, except insofar as the parties might vary such predetermined terms, constitute the terms of the contract between Tekmat and Dosto, without remembering that he had done so. It would have been too important an event to have escaped his notice or faded from his memory. On the other hand it is not inconsistent with the evidence of Mr Williams and Mr Koundouris that the Legal and General contract received mention during the meeting, but mention almost in passing, without any intention that its contents be fixed upon there and then as the contents of the parties' contract. Accordingly, I am satisfied that Mr Williams did mention something about the Legal and General contract on 11 September 1987 as providing a sort of guide or basis for a formal document to be later executed on behalf of each of the parties. I am also satisfied that Mr Shaw, at that meeting, said something to the effect that the Legal and General contract would need modification or amendment to reflect appropriately the differences between the Legal and General project and the Homeworld project. It is also clear, and I find, that a number of matters were not the subject of agreement on 11 September 1987. They included in particular the effect on the price of delay and late or early completion, and of variation in design and materials.

18. On the pleadings, Tekmat alleges that Dosto "agreed to contract with the plaintiff for the plaintiff to construct" the Homeworld project (paragraph 4 of the third amended statement of claim dated 4 September 1990). However, Mr Shaw asserts (paragraph 6, affidavit sworn 29 July 1988) that at the meeting on 11 September 1987,

"Koundouris accepted the plaintiff's offer to
construct the shopping centre (to be known as
"Homeworld") for $8.4 million".

This assertion is inconsistent with the claim pleaded that as at 11 September 1987 negotiations had reached the stage only where the plaintiff had "agreed to contract", that is to say where negotiations had not yet ended in contractual relations.

19. Indeed, the case for Tekmat was conducted at the trial on the basis that a contractual relationship did arise on 11 September 1987, it being Tekmat's primary submission that the terms of the contractual pact on that date incorporated the terms of the Legal and General contract except insofar as they might be varied by agreement of the parties and that those terms were in fact varied by subsequent agreement on 26 February 1988, the result being that on that latter date the terms of the Legal and General contract as so varied become the terms of the contract between Tekmat and Dosto. There was, however, a secondary and alternative submission put on behalf of Tekmat that on 11 September 1987 there was agreement between Tekmat and Dosto to carry out work on the Homeworld project for $8.4m on further terms to be agreed and that those further terms were, as it happened, agreed on 26 February 1988. On either submission, it must be observed, Tekmat asserts, as does Dosto, that the parties entered into a contractual relationship on 11 September 1987 for the construction of the Homeworld project for a price of $8.4m.

20. In my view, it is unlikely that there was common consent between Tekmat and Dosto on 11 September 1987 that, except insofar as the parties might vary particular provisions of it, the Legal and General contract, a contract between Tekmat and another party for the erection of another building, provided a mutually satisfactory basis for the recording of the terms of their agreement.

21. Accordingly, subject to the question of the nature of the price agreed upon, I make a finding which is in accord with both the secondary submission made on behalf of Tekmat and the claim by Dosto, namely that the parties did enter into a contract on 11 September 1987 whereby Tekmat agreed to construct the Homeworld project on Dosto's behalf.

22. The question remains whether, as alleged by Tekmat, the terms of the agreement were varied, expanded or modified at some later date. On 15 September 1987, Mr Koundouris wrote to Mr Shaw as follows:-

"This letter is to confirm the intention of Dosto
Pty Limited to contract with Tekmat Pty Limited for
the construction of the project known as 'Homeworld
Tuggeranong' on the above blocks for a guaranteed
fixed maximum price of $8,400,000.00.
Contracts are now being drawn up by our respective
solicitors concerning the detail of our agreement.
Much of that detail has been incorporated in
correspondence and reports, the latter being
prepared by consultants retained by my company.
It is my company's intention, and I know it is also
your company's intention to execute that contract as
soon as it is ready. However, from a legal point of
view Dosto Pty Limited considers itself
contractually bound as from our meeting last Friday
the 11th September 1987, to Tekmat Pty Limited and
we understand that Tekmat Pty Limited considers
itself bound to develop the project along the lines
of the correspondence and reports referred to above,
and plans and briefs agreed upon by us to date."

23. This letter was sent by Mr Koundouris in response to a request by Mr Shaw that there be something in writing to record the agreement that had been consummated on 11 September 1987. The term "intention...to contract" in the first paragraph of the letter, I take to refer to an intention to execute a formal contractual document, as contemplated in the second paragraph of the letter. The assertion in the third paragraph of the letter that it was the intention of Tekmat to execute the written contract as soon as it was ready, and the further assertion by Dosto that Tekmat considered itself bound to develop the project along the lines indicated could not, of course, be binding upon Tekmat, but I am of the view that in the light of all the evidence the letter accurately reflects the agreement entered into on 11 September 1987.

24. Was there a variation? Mr Topfer, solicitor for Tekmat, in the latter stages of negotiation in the Legal and General contract and with knowledge therefore of its contents, does not appear to have received instructions to draw up a formal contract on Tekmat's behalf for the Homeworld project until after 11 September 1987. Direct discussion between the parties, and not through the medium of solicitors, continued as late as 17 November 1987. Whenever it was that Mr Shaw first gave instructions to Mr Topfer to negotiate towards the agreement on terms additional to or varied from those agreed on 11 September 1987, it is by no means assured that those instructions accurately represented the terms of the agreement already reached. Whilst it may be true that Mr Shaw's recollections of events on 11 September 1987 might have been better when he first gave instructions, his recollection has since become confused and inaccurate and it may have been less than precise when instructions were first given to Mr Topfer. It is in that light that I approach the evidence of subsequent negotiations which were clearly towards the preparation of a formal contract to be executed by the parties.

25. On 3 November 1987, Mr Williams sent Mr Topfer a "draft copy of the proposed Head Agreement and General Conditions" with a request for comments as soon as possible. This draft was in evidence as GES2. Although there had, according to Mr Topfer, been discussion between himself and Mr Williams about the matter particularly in relation to terms relating to payment and to finance, this was the first written communication between solicitors. There had, in the meantime, been correspondence as well as verbal negotiation between the parties direct. A further meeting took place on 30 November 1987, the purpose of which was the discussion of the terms of the written document to be prepared. Mr Shaw and Mr Topfer on the one hand and Mr Koundouris and Mr Williams on the other were present and the contents of GES2 were discussed. Again, agreement could not be reached on a number of matters and by common consent Mr Williams undertook to redraft GES2 in the light of those discussions.

26. The result was a further draft by Mr Williams of the proposed Head Agreement and General Conditions. This further draft was in evidence as GES3. This document was sent by Mr Williams to Mr Topfer under cover of a letter of 27 January 1988. Mr Topfer responded by letter of 15 February 1988 in which he set out in detail "the changes required by our client". Clearly GES3 was not acceptable in its entirety to Tekmat. In relation to clause 12 in GES3, Mr Topfer suggested that letters passing between the parties dated 28 August and 31 August 1988 be included in and form part of the formal contract because of certain matters relating to design and cost agreed "at the time of acceptance of tender". Among other suggestions was that clause 32(k), initially included in GES1 but omitted from GES2, should be reinstated. The letter of 15 February 1988 also noted that Tekmat had been "carrying out work for about four months and is concerned at the lack of a written agreement".

27. A further meeting took place on 26 February 1988 with the same persons present as previously. Discussion took place around the provisions set out in GES3 and the letter of 15 February 1988. That letter provided an informal agenda for the meeting. Again, whilst agreement was reached on certain matters, there was disagreement on the others, including clause 32(k). Mr Williams considered that the parties were "a long way apart" on a number of matters. Mr Topfer said in evidence that there was no final conclusion about the state of the contract. Negotiations continued direct between Mr Shaw and Mr Koundouris, but it is common ground that no further agreement was reached by them. Subsequently, Mr Topfer drew up a schedule which represented the agreed changes to GES3 which had been agreed upon at the meeting on 26 February 1988. He then incorporated that schedule into a further document based on GES3 but which allowed for the agreement as to certain changes reached on 26 February 1988. That final document was annexure "A" to the statement of claim filed on 18 July 1988. The statement of claim originally filed sought a declaration that annexure "A" constituted the agreement reached between the parties.

28. The essential question that needs to be determined on the matter of an alleged variation of the agreement made on 11 September 1987 is whether or not the parties agreed to be bound by the various individual items on which agreement was reached on 26 February 1988 or whether agreement on the individual items was provisional only and not intended to be binding until there was agreement on the whole of the terms to be incorporated into the Head Agreement and General Conditions. Mr Topfer and Mr Williams each said in evidence that the formal Head Agreement was to be "self contained", that is to say that it would not be put into a form or state ready for execution until all the terms that were to be included in it were the subject of agreement.

29. In his affidavit sworn 29 July 1988, Mr Topfer says, on the face of it, that he took GES3, that is to say the proposal by Mr Williams, and changed it only to the extent that agreement had been reached on changing it. On that premise the argument seems to be that GES3 formed some sort of further offer made on behalf of Dosto, some of the terms of which were the subject of subsequent negotiation and agreement and the remaining terms of which were ultimately the subject of acceptance by Tekmat. However, the difficulty with that argument as I see it is that, first, there is no evidence that the parties, and in particular Dosto, regarded the offer as severable to the extent that some of the terms were subject to negotiation and other terms subject to acceptance only as they stood. More importantly, nothing on the part of Tekmat can be pointed to as constituting an act of communication of acceptance of a notional offer made on behalf of Dosto.

30. I take into account that there is some evidence that Dosto regarded some of the provisions of GES3 as being contractually binding, for instance the obligation to provide a bank guarantee and the right or obligation of each party to appoint a site representative. This does not, in my view, affect the issues to be decided. Whilst the correspondence after 26 February 1988 shows that the parties accepted as binding certain terms which had not been agreed as at 11 September 1987, that is a long way from being agreed that the whole of GES3, except where the subject of agreed variation, was to be binding. The evidence is to the contrary. It is common ground that important questions still remained in dispute at 26 February 1988. Some of these were the definition of variations and the effect on the contract price, incorporation of letters of 28 and 31 August 1987 into the formal contract, matters relating to nominated sub-contractors, and clause 32 relating to the effect of delay on the contract price.

31. I conclude that the parties did not intend to be bound by any indication of assent to any particular one or more of the terms in GES3 or any particular one or more of the terms which, by common consent, were to be varied, until the stage was reached that there was agreement on all terms. Clearly that stage was never reached and the contract was not as the plaintiff submits on its primary submission.

32. The plaintiff's alternative submission begins with the premise for which Dosto also contends, namely that on 11 September 1987 the parties agreed that the plaintiff would construct the Homeworld project for $8.4m. As I have indicated, I find that proposition established. Dosto contended further in argument that at that stage it was agreed that the price was a price of a certain type, a "guaranteed fixed maximum price" and the court should, in its declaratory judgment, include a declaration to that effect. However, that submission was not pressed to the stage that it ever became incorporated in the pleadings and at the end of the day the declaration sought by the defendant in its amended counterclaim filed in Court on 5 September 1990 refers simply to "consideration to be paid by the defendant to the plaintiff of $8,400,000 in accordance with the terms of that agreement".

33. However, on Tekmat's alternative submission it is argued that there were various further terms agreed after 11 September 1987 and on or before 26 February 1988. In my view, this has not been shown. On the contrary, the likelihood is that the parties, by 26 February 1988, were still not in agreement as to what was to constitute the formal Head Agreement and General Conditions, the formal document that was to supplant the agreement entered into on 11 September 1987. The fact that the parties accepted that Tekmat provided a bank guarantee and that a site representative was appointed by each party does not obscure that essential proposition any more than does the fact that the construction of the Homeworld project progressed to completion. In my view, it has not been shown that the parties agreed on or before 26 February 1988 that any part of GES3 was binding on them to the extent that it added to or varied the contract they entered into on 26 November 1987. Accordingly, the plaintiff's claim for declarations is dismissed. The defendant's counterclaim is upheld and I propose to make a declaration in accordance with paragraph AA on page 5 of the amended defence to the third amended statement of claim filed in Court on 5 September 1990 that on or about 11 September 1987 the plaintiff agreed with the defendant to construct an office and shopping centre complex known as Homeworld Tuggeranong on land described as Sections 1322 and 1323 in Tuggeranong in the Australian Capital Territory for consideration to be paid by the defendant to the plaintiff in the sum of $8.4 million in accordance with the terms of that agreement.

34. As requested by counsel, I give leave to the parties to bring in short minutes of orders and I will hear the parties on costs.