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Supreme Court of the ACT Decisions |
COURT
IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORYCATCHWORDS
Contract - construction and interpretation - provision for increased payment for supply of air surveillance services - reference to purchase price of aircraft - whether provision referred to modified or unmodified aircraft - remainder of contract silent on issue - admissibility of surrounding circumstances to resolve ambiguity - circumstances clear that plaintiff to purchase aircraft in unmodified condition - circumstances indicate that plaintiff to be party at risk regarding increased cost of modification.
Contract - construction and interpretation - admissibility of extrinsic evidence - pre-contractual negotiations - only where contract ambiguous - evidence of subjective intention or understanding inadmissible.
Contract - breach of contract - provision for increased payment for supply of air surveillance services - dispute as to interpretation - defendant makes offer in accordance with defendant's interpretation - whether plaintiff entitled to judgment in amount originally offered by defendant.
Estoppel - estoppel by convention - pre-contract negotiations - estoppel inconsistent with subsequent written contract - "entire contract" provision - post-contract dealings - evidence of negotiations and dealings inadmissible as a matter of principle.
Estoppel - promissory estoppel - whether plaintiff assumed that defendant would pay for or contribute to aircraft modification costs - whether active inducement on part of defendant of assumption by plaintiff - conversation immediately prior to execution of contract as to meaning of term - whether opinion as to meaning authorised or intended to be relied upon - post-contract minute recording opinion as to meaning of term uncommunicated to other party - whether minute constituted admission of estoppel - whether minute "fed" estoppel - whether failure to correct an assumption sufficient for estoppel - estoppel not available where plaintiff responsible for the assumption relied upon.
Codelfa Construction Proprietary Limited v. State Rail Authority of New
South Wales [1982] HCA 24; (1982) 149 CLR 337
Commonwealth of Australia v Amann Aviation Pty Ltd (1992) 104 ALR 1
State Rail Authority of New South Wales v. Heath Outdoor Pty Ltd (1986) 7
NSWLR 170
Kevin Lindgren, QC, Recent Developments in Estoppel, paper delivered to NSW
Bar Association, 11 April 1994
Kevin Lindgren, QC, Estoppel in Contract (1989) 12 University of New South
Wales Law Journal 153
Whittet v. State Bank of New South Wales (1991) 24 NSWLR 146190
Johnson Mathey Ltd v. A.C. Rochester Overseas Corporation (1990) 23 NSWLR
Waltons Stores (Interstate) Ltd v. Maher [1988] HCA 7; (1988) 164 CLR 387
Silovi Pty Ltd v. Barbaro (1988) 13 NSWLR 466
Austotel Pty Ltd v. Franklins Selfservice Pty Ltd (1989) 16 NSWLR 582
Hoyts Pty Ltd v. Spencer [1919] HCA 64; (1919) 27 CLR 133
HEARING
SYDNEY, 15-17, 21-25 and 28 February, 1-4 March and 16-17 June 1994
Counsel for the plaintiff: Mr. R. Conti, QC with Mr. P. Gray
Solicitors for the plaintiff: Sly and Weigall
Counsel for the defendant: Mr. A.J. Sullivan, QC with
Mr. A. Robertson
Solicitors for the defendant: Australian Government Solicitor
DECISION
Nature of case: a summary of undisputed facts
2. In a request for tender circulated on or about 1 June 1989 ACS sought tenders for the provision of aerial coastal surveillance on its behalf. The request for tender indicated that tenders should include the nomination of three particular aircraft which the tenderer proposed to be used to perform Task Two.
3. After meetings between ACS officers and representatives of Skywest, Skywest submitted the tender on 10 August 1989. The tender nominated three particular aircraft by serial number. They were all Westwind 1124 aircraft, manufactured by Israel Aircraft Industries Limited (IAI). The tender provided that the three aircraft so nominated (the nominated aircraft) were to be converted to a condition which would make them suitable for aerial maritime surveillance. The conversion process was to be carried out by IAI. The process was one which it had previously performed on other Westwind 1124 aircraft, including aircraft which were then being used by the Israeli navy for surveillance. The aircraft so converted were known as SeaScan.
4. By the time the Coastwatch contract was executed, however, Skywest had become aware that the nominated aircraft might no longer be available for purchase, but that other similar but not identical Westwind 1124 aircraft might be available in substitution. Skywest was also aware that the purchase price of the substituted aircraft was likely to be greater than that anticipated for the aircraft originally nominated. Skywest was aware further that because of the differences in substituted aircraft from the aircraft initially nominated (and from each other), the cost of conversion to SeaScan might be greater. In particular, Skywest was aware that the substituted aircraft might need to be subjected to a process known as "equalization" or "standardisation" (or both), which involved removing from the substituted aircraft any inappropriate equipment or fittings and in effect stripping them back to a condition where they could then be subjected to the conversion to SeaScan. Skywest considered that the need for or cost of equalization or standardisation of the three nominated aircraft was negligible, or in practical terms, insignificant.
5. To some extent these possibilities were contemplated by Skywest before tender and the tender itself provided that Skywest would seek to negotiate a "one off adjustment to the rates tendered" in the event of the three nominated aircraft or similar aircraft not being available at the time of contract award for a price not exceeding US$1.8 million each.
6. Negotiations ensued during which these matters were discussed. Eventually
when the Coastwatch contract was executed it contained
clause 4A which was in
the following terms:
"4A. ADJUSTMENT TO FIXED COST COMPONENT7. After the Coastwatch contract was entered into, Skywest in early 1990 entered into three separate agreements (the vendor purchase agreements) for the purchase of three separate Westwind 1124 aircraft from three separate vendors. Those aircraft bore the serial numbers 253, 272 and 259. The vendor purchase agreements provided that purchase of each aircraft was to be by Skywest or its nominee. The total of the purchase prices was US$5.918, the purchase price for each aircraft being in excess of US$1.9 million. Skywest then entered into an agreement with its associate and nominee, Transpacific Enterprises Inc., dated 28 June 1990 (the TPE purchase contract) whereby Skywest agreed to purchase from the nominee the three aircraft after they had been converted and modified to SeaScan in accordance with an agreement already entered into between Skywest and IAI on 22 January 1990 (the modification agreement). The purchase price for each aircraft to be paid by Skywest to the nominee company was in excess of US$5 million per aircraft.
4A.1 Notice of Variation of Fixed Cost Component of Task Two
On and from the Commencement Date for Task Two specified in Schedule 5
the Contractor may notify the Commonwealth of a variation to the Fixed
Cost Component payable in relation to Task Two, derived from the
liability of the Contractor for:
(a) the difference in interest charges (expressed in Australian
dollars) calculated on moneys borrowed to purchase aircraft for the
performance of Task Two between:
(i) the interest at normal commercial rates payable on a purchase
price per aircraft of one million eight hundred thousand US dollars
(US$1,800,000.00); and
(ii) the interest at normal commercial rates payable on the purchase
price per aircraft paid by the Contractor; and
(b) depreciation costs, calculated on a whole of life of twenty (20)
years in respect of so much of the purchase price per aircraft as
exceeds one million eight hundred thousand US dollars
(US$1,800,000.00).
4A.2 Supporting Documentation
Where the contractor notifies the Commonwealth of a variation pursuant
to Clause 4A.1, such notification shall include all supporting
documentation detailing the effect on the Fixed Cost Component of any
variation in the purchase price, the foreign exchange rates applicable
to the purchase price, and depreciation costs.
4A.3 Verification by Contract Authority
Upon verification by the Contract authority of a notice and supporting
documentation received by the Commonwealth pursuant to this Clause 4A,
the Fixed Cost Component for Task Two shall be varied and shall be
deemed to have been varied on and from the Commencement Date for Task
Two specified in Schedule 5."
8. After a series of collateral transactions aimed at having the aircraft registered in the United States, they were flown to Israel where IAI carried out the modification to SeaScan, including the "equalization" process. During this time the cost of modification and other costs, particularly those associated with keeping the aircraft safe during the Gulf war, increased considerably. Eventually the aircraft were delivered by IAI to Skywest in Israel, one in January and two in March 1991, and flown to Australia where they were registered and put into service in pursuance of the Coastwatch contract.
9. Ultimately, Skywest paid to its nominee company pursuant to the TPE purchase contract a sum which exceeded US$1.8 million per aircraft. The excess was more than US$3 million in respect of each aircraft, and the total excess was US$9.593 million.
Causes of action and pleadings
10. Skywest claims damages for breach of contract, and alternatively, damages
founded upon equitable estoppel.
11. The claim for breach of contract relies upon the Coastwatch contract as a contract wholly in writing and asserts an interpretation of clause 4A of the Coastwatch contract which would have the effect of including within the term "purchase price" as employed in that clause the cost to it of modification to SeaScan. The Commonwealth admits the written contract but denies liability for breach and makes a counterclaim for rectification of the Coastwatch contract by insertion of the words "unmodified Westwind 1124" before the word "aircraft" where first appearing in para. 4A.1(a) and para. 4A.1(b).
12. The question of the construction to be placed upon clause 4A is not simply a matter of interpreting the term "purchase price". What clause 4A does, as the heading suggests, is to provide for an adjustment to the fixed cost component of Task Two of the Coastwatch contract. The adjustment takes place if three requirements are complied with. First, there is to be a notice of variation in accordance with sub-clause 4A.1; second, the notification must include all supporting documentation under sub-clause 4A.2 and, lastly, the notice and supporting documentation is to be verified by the contract authority under sub-clause 4A.3.
13. According to sub-clause 4A.1, the variation is derived from the liability
of the contractor, Skywest, for, first, the difference
in interest charges on
moneys borrowed to purchase the aircraft calculated in accordance with
para.(a) and, secondly, depreciation
costs calculated in accordance with
para.(b). Counsel for Skywest and for the Commonwealth both submit that
extrinsic circumstances
can be looked at in order to ascertain the joint
intention of the parties as recorded in the contract. The rule is as expressed
by
Mason J (as he then was) in Codelfa Construction Proprietary Limited v.
State Rail Authority of New South Wales [1982] HCA 24; (1982) 149 CLR 337 at 352:
"The true rule is that evidence of surrounding circumstances is14. The scope of the "true rule" is, with respect, clear enough, despite its apparent conflict with the parol evidence rule as the latter has been formulated on some occasions.
admissible to assist in the interpretation of the contract if the
language is ambiguous or susceptible of more than one meaning. But it
is not admissible to contradict the language of the contract when it
has a plain meaning. Generally speaking facts existing when the
contract was made will not be receivable as part of the surrounding
circumstances as an aid to construction, unless they were known to
both parties, although, as we have seen, if the facts are notorious
knowledge of them will be presumed.
It is here that a difficulty arises with respect to the evidence of
prior negotiations. Obviously the prior negotiations will tend to
establish objective background facts which were known to both parties
and the subject matter of the contract. To the extent to which they
have this tendency they are admissible. But in so far as they consist
of statements and actions of the parties which are reflective of their
actual intentions and expectations they are not receivable. The point
is that such statements and actions reveal the terms of the contract
which the parties intended or hoped to make. They are superseded by,
and merged in, the contract itself. The object of the parol evidence
rule is to exclude them, the prior oral agreement of the parties being
inadmissible in aid of construction, though admissible in an action
for rectification.
Consequently when the issue is which of two or more possible meanings
is to be given to a contractual provision we look, not to the actual
intentions, aspirations or expectations of the parties before or at
the time of the contract, except in so far as they are expressed in
the contract, but to the objective framework of facts within which the
contract came into existence, and to the parties' presumed intention
in this setting. We do not take into account the actual intentions of
the parties and for the very good reason that an investigation of
those matters would not only be time consuming but it would also be
unrewarding as it would tend to give too much weight to these factors
at the expense of the actual language of the written contract."
15. The resolution of the conflict is to be found in the requirement in the words of Mason J, that for extrinsic evidence to be admissible, there must be some ambiguity in the words in question. Ambiguity in this sense is a word of wide import and it has been suggested that few contracts contain language that is not somewhere and in some respects without ambiguity. In any event, counsel for each of the parties in the present case submit that if evidence of the surrounding circumstances is taken into account, the references to "purchase price" in clause 4A should be read as, according to the submissions on behalf of Skywest, the price paid for modified aircraft, including the cost of modification to SeaScan, or, according to the submissions on behalf of the Commonwealth, the price paid for aircraft without inclusion of the cost of modification to SeaScan.
16. It is therefore necessary to go to the evidence before deciding whether Skywest can succeed on its claim under the Coastwatch contract. The surrounding circumstances admissible to assist in interpreting the contract are narrower than the various facts and circumstances upon which Skywest would rely in order to set up its claim for equitable estoppel.
17. Evidence about surrounding circumstances which goes merely to show subjective intentions and expectations is, as Mason J says, inadmissible to assist in interpreting the meaning of the contract. But, as Mason J went on to say at 346, actual intention is relevant in a claim for rectification. The ambit of evidence admissible in the counterclaim for rectification is, therefore, wider than that in the claim under the contract.
18. Skywest relies on a wide range of circumstances in support of its
contention that, prior to entering into the Coastwatch contract,
it was
induced by the Commonwealth to believe and rely upon a number of assumptions
and expectations. On the face of it, those circumstances
appear to be
admissible in the estoppel claim. Those assumptions and expectations as
relied on in the amended statement of claim
may be summarised as follows:
(a) That acceptance of Skywest's tender would be on the basis that19. It is claimed on Skywest's behalf that the Commonwealth has refused or withheld from fulfilling the terms of the assumptions and expectations set out above by failing to pay to Skywest "at least" the sum of (i) the difference between the anticipated purchase price of the aircraft of $1.8 million each and the price paid for the initial acquisition of the three substitute aircraft which the nominee company purchased and had converted to SeaScan by IAI, and (ii) the costs of equalization and standardisation and various other charges and costs incurred by Skywest in acquiring the three substituted aircraft (including "those occasioned by the hostilities in the Middle East").
Westwind aircraft converted to SeaScan would be utilised for
performance of Task Two;
(b) That Skywest would not be required to take steps to purchase or
acquire the aircraft nominated in the tender until after the
Coastwatch contract was entered into;
(c) That Skywest's nomination or the tender of the Westwind aircraft
294, 296 and 297 was "predicated" upon their availability for purchase
in their condition and otherwise upon reasonable terms; further, the
likelihood of Skywest acquiring the three nominated aircraft would
diminish over the time taken by the Commonwealth to accept Skywest's
tender; and further, that in the event the of unavailability of the
nominated aircraft, Skywest would be compensated under a provision for
escalation of costs to be included in the Coastwatch contract;
(d) That Skywest nominated the three particular aircraft because of
their "equivalence" to each other and if Skywest did not acquire the
three initially nominated aircraft, then it was unlikely that it would
be able to acquire the three other Westwind aircraft in the same state
of "equivalence";
(e) That modification and conversion to SeaScan would be carried out
mainly in Israel by IAI, along with equalization and standardisation
under a contract not yet finalised because of the absence of
acquisition by Skywest of the aircraft to be modified, and that
Skywest had obtained from IAI estimates of the cost of conversion to
SeaScan upon the predication and basis referred to in (c) and (d)
above;
(f) That if the three nominated aircraft were not available to
Skywest, then the costs of equalization and standardisation of
whatever three substituted aircraft might ultimately be acquired by
Skywest and of their conversion to SeaScan, which could not be
estimated prior to contract, were costs for which Skywest would be
compensated under a provision for escalation of costs in the
Coastwatch contract.
20. The relief sought in respect of the claim for equitable estoppel is for compensation or damages of over $4.423 million up to 31 December 1992, and for a declaration that Skywest is entitled to a variation of the Fixed Cost Component in accordance with clause 4A of the Coastwatch contract from 1 January 1993 until the cessation of services under the contract, and for interest and costs.
21. The Commonwealth raises a number of matters by way of defence. In relation to the claim under clause 4A of the Coastwatch contract, it says that the clause should be interpreted so that the term "aircraft" refers to aircraft purchased before their modification to SeaScan. Alternatively, it says that the Court should order rectification to give effect to such a meaning. In answer to the claim in estoppel the Commonwealth says that no claim in estoppel is available as a matter of law on the facts pleaded by Skywest. Alternatively, it denies many of the facts relied upon and says that on the evidence Skywest has not made out a claim of estoppel or, which may be the same thing, that Skywest has not made out a claim which justifies the granting of any of the relief sought. Alternatively and lastly the Commonwealth claims that Skywest is estopped from asserting that clause 4A should be interpreted as claimed and estopped from recovering amounts referable to the equalization of aircraft or their modification or the purchase of SeaScan aircraft being the Westwind 1124 aircraft as modified.
22. An outline of the case so far would indicate that there are a number of difficult and complex issues of fact and law. There is also an initial question of credit of witnesses which needs to be resolved before some of the necessary findings of disputed fact can be made.
Narrative of facts - precontract
23. It is convenient to state more fully in narrative form the facts as
established by the evidence, reserving for later discussion
and determination
some of the particular factual matters in dispute.
24. Surveillance of the northern Australian coastline became the subject of increased attention on the part of the Commonwealth Government in the late 1980's. The primary purpose of coastal and offshore surveillance was to provide information to the Government concerning the activities of vessels and aircraft in the area and particularly the detection of unauthorised fishing in the Australian Fishing Zone and of unauthorised landings on Australian territory. From 1982 some of the aerial coastal surveillance services (known as Coastwatch) were provided to the Commonwealth by Skywest on contract. Other surveillance was carried out through the use of Royal Australian Navy aircraft. In 1987, the Commonwealth decided not to renew Skywest's contract and to call for tenders for surveillance for a period of three years. The successful tenderer was Amann Aviation Pty Limited (Amann). The Commonwealth and Amann entered into a formal contract. However, on the very day that Amann commenced operations the Commonwealth purported to terminate the contract on the ground of Amann's failure to comply with its contractual obligations. Skywest responded to an urgent request from the Commonwealth that it resume some of the offshore surveillance tasks on a provisional basis, and it did so. Subsequent litigation held the Commonwealth liable to Amann for repudiation of the contract: Commonwealth of Australia v. Amann Aviation Pty Ltd (1992) 104 ALR 1.
25. On 19 November 1987 the Commonwealth received a review of tender procedures for coastal surveillance contracts (the Menzies Report). The review identified certain weaknesses in the Commonwealth's tendering processes and made recommendations designed to ensure that consideration of tenders be carried out with greater care and formality. A further inquiry into the administration and management of civil coastal surveillance in northern Australia (the Hudson report) recommended in April 1988 that an independent Australian Maritime Safety and Coastwatch Agency be established. The outcome, however, appears to have been that a unit was set up within the ACS in order to administer what was called the Coastwatch Sub-program. The Department of Administrative Services (DAS) also played some role in this, at least in the early stages.
26. By 1989, Skywest had clearly built up considerable experience in the provision of aerial coastal surveillance services and it appears that it had a reputation to match its experience.
27. On 2 May 1989 the Minister announced that tenders would be called for the Coastwatch services. To this end the Commonwealth prepared a document called "Request For Tender" (RFT) which was available to those interested. The services to be performed in accordance with the RFT were extensive and were divided into separate groups called Tasks. Task One was the provision of visual surveillance of the inshore areas from Exmouth to Bundaberg (to be extended in the course of time to surveillance by electronic means). Task Two, with which this case is concerned, was the provision of electronic and visual surveillance of the extensive area between 15 and 600 nautical miles offshore from Perth to Brisbane. Task Two marked a considerable innovation, as electronic surveillance had previously been a Defence Force function. The Commonwealth did not have available to it any background documentation or cost estimates for civilian surveillance.
28. Skywest had been anticipating the announcement for some months at least and had appointed a manager of what it called the Coastwatch Renewal Project (the Project). Members of senior management of Skywest took an active interest in the proposal as soon as it was announced.
29. On 23 June 1989 the Commonwealth conducted a tender briefing meeting in Canberra, attended by various people representing different interests in the aviation industry. It was attended by Mr. William Meeke, Chief Executive and Director, Mr. Andrew van Kann, Manager of the Project, and other representatives of Skywest. The Commonwealth representatives included Mr. Phillip Burns, Assistant National Manager, Coastwatch, who acted as National Manager from time to time and Mrs. Judith Anderson, Senior Inspector, Contracts, ACS.
30. The meeting was addressed by Mr. Graham Giles, who bore the official title within ACS of Chief Inspector (Contracts), Coastwatch Sub-program. At that meeting, or in a conversation in Mr. Giles' office on 21 July 1989, or both, Mr. Giles made the Skywest representatives aware that there was a strict limit on the funds available for Coastwatch, that the annual operating costs of Coastwatch overall would increase by about A$4m per year under the new contract, with A$88m available all told over the expected five years of the contract, or A$17m a year. The Skywest representatives formed the view that the Commonwealth had about A$10m per annum to spend on Task Two.
31. After the tender briefing meeting the Skywest management team for the Project prepared a "top down budget" in order to identify the cost components likely to be incurred in performance of the surveillance required and in order to make possible selection of the type of aircraft most suitable for the performance of the surveillance task. The limit of the expected Commonwealth budget meant that any aircraft to be acquired would be used aircraft and not new aircraft. Mr. Brian Johnson, marketing manager at Skywest, had prime responsibility for evaluating aircraft in this exercise. The aircraft so identified were Westwind aircraft, manufactured by IAI but no longer in production. Skywest was aware that Westwind aircraft were manufactured as executive passenger aircraft but that some were currently in use in Australia for freight purposes. Skywest was also aware that the Israeli Navy was using three Westwind aircraft for the purpose of maritime surveillance and that these aircraft had been converted by IAI for that purpose into a modified form known as SeaScan. Skywest ascertained that Westwind aircraft converted to SeaScan by the manufacturer were likely to be regarded favourably by the Civil Aviation Authority (CAA) for the purpose of registration in Australia. (The term SeaScan seems to have been used interchangeably to mean the modified aircraft themselves as well as the modified form of such aircraft.)
32. Mr. Meeke and Mr. Johnson flew to Israel on 27 June and spoke to IAI representatives. They left Israel two days later in the belief that Westwind aircraft were available to be acquired by Skywest and modified to SeaScan within the budget limits anticipated by Skywest. (The aircraft that Mr. Johnson had originally thought suitable were of a particular subspecies known as Westwind 2, but in Israel IAI convinced Skywest that Westwind 1 was the more appropriate aircraft type. It is sufficient to refer to the latter simply as Westwind.)
33. By 25 July 1989, Skywest received from IAI information by telephone that four Westwinds were available for purchase in Germany. Skywest made contact with a Mr. Kruse, an aircraft dealer in Germany, and subsequently received information from him that four Westwinds previously used for target towing purposes were available but that it was likely that they would soon be shipped from Germany to the United States. Mr. Kruse furnished the serial numbers of these four aircraft. Mr. Meeke then ascertained from IAI that one of the aircraft had been seriously damaged in an accident (making it unsuitable for registration in Australia) but that the others, serial numbers 294, 296 and 297, would be suitable for modification to SeaScan. Indeed, Mr. Meeke claimed that Mr. Granot of IAI said that 294, 296, 297 and a fourth aircraft, 310, would be "ideal".
34. Skywest then adopted the view that, acting on information obtained by Mr. Johnson as to market prices of Westwinds, the figure of US$1.8m per aircraft was proper to take into account as the cost of acquisition by Skywest of Westwind aircraft suitable for subsequent modification to SeaScan by IAI at Skywest's expense. At that stage, Skywest took into account also the likely cost of modification, as advised to it by IAI on 3 August 1989, at US$.680m per aircraft. The advice of IAI was given in what was called "rough order of magnitude" (ROM) prices, IAI being unwilling to commit itself to a firm figure. A draft Statement of Work (SOW) on 31 July 1989 provided, under the heading "Purchase of Aircraft", that Skywest would deliver to IAI "three Westwind Model 1124 aircraft that are suitable for modification into the Maritime Patrol Configuration". The SOW did not identify the nominated aircraft by serial number or otherwise, although they were among the aircraft mentioned in discussions between Skywest and IAI. Those discussions had included the option of IAI acquiring Westwind aircraft and selling them to Skywest. The SOW price included $59,100 for aircraft "standardisation".
35. On 9 August 1989 Mr. Meeke wrote to IAI referring to information gained from various sources other than IAI relating to the availability and prices of Westwinds from which Skywest had selected three "to form the basis of our tender for Task 2 at an average purchase price of US$ 1.8million" and that the "IAI modified 1124 (SeaScan) is the nucleus of our tender". The letter did not identify the nominated aircraft. It drew attention to the time that would pass before Skywest was irrevocably committed to purchase the three Westwinds, emphasised that "our tender prices must be predicated on our best understanding of present market prices and aircraft availability", and sought ongoing advice from IAI as to availability and prices of suitable aircraft.
36. Skywest's tender was delivered to the Commonwealth on 10 August 1989. It
proposed the use of "three Israeli Aircraft Industries
(IAI) SeaScan twin
turbofan maritime surveillance jet aircraft to meet the Task 2 (sic)
requirement of the RFT". The tender (part
D, para. 2.2) described SeaScan
as:
"a derivative of the highly successful and Australian certified37. The tender nominated in response to details sought in the RFT airframe serial numbers 294, 296 and 297 (the nominated aircraft). The tender stated that the three Westwind 1124s "will be purchased in sufficient time to enable the timely commencement of the conversion of the aircraft to the SeaScan by IAI" and anticipated that "the Westwinds will be purchased and delivered to Tel Aviv within three months of awarding of contract" (sic).
Westwind 1124 business jet and has demonstrated exceptional
performance and capability while carrying out the maritime
surveillance role for Israel Defence Forces throughout the past eight
(8) years".
38. In para 4 of part I of the tender, under the heading "Aircraft Capital
Costs", appeared the following provision which assumes
particular potential
importance in this case:-
"Skywest has been successful in negotiating, for Metro III aircraft, a39. In response to the tender, ACS, on 19 September 1989, issued a questionnaire which inter alia sought an answer to the question "Are options presently held on Westwind aircraft?". The answer given by Skywest on 25 September 1989 rejected as meaningless the idea of an option on aircraft and continued:
firm price which will remain valid throughout the tender assessment
period. This was not possible with the SeaScan aircraft and our rates
for this option are based on aircraft availability and prices
applicable at the time of tendering. Three (3) suitable Westwind
aircraft (serial numbers 294, 296 and 297) were identified as being
available at the time of tender, at a cost of US$1.8 million each.
Our Offer for the Task Two SeaScan option assumes these, or similar
aircraft falling within the serial number range 290 to 310, are
available at the time of contract award for a price not exceeding
US$1.8 million each.
Should this prove not to be so, Skywest would seek to negotiate a
one-off adjustment to the rates tendered."
"Our research has revealed that sufficient Westwinds are currently40. It is clear that from its reception ACS was particularly interested in the tender put forward by Skywest. AIS officers were also aware of the Amann affair and were careful that they should not say or do anything which might be construed as a premature indication that Skywest would be the successful tenderer. A Tender Evaluation Committee (TEC) was formed with representatives of government agencies and departments apart from ACS.
available to enable Skywest to engage in aggressive future
negotiations. In fact the three aircraft nominated in our response
are still on the market. Current prices are consistent with costings
used in our tender.
Further, we are also 'testing the market' by entering into purchase
negotiations for individual aircraft but will stop short of any
commercial commitment until and unless we are awarded the Coastwatch
contract. Skywest would be pleased to table the above file if
required during forthcoming discussions.
Further, we refer you to our tender response Page D45 clause 9.2 (b)
nominating purchase schedules for the Westwinds. In fact, the most
recent update of our 'project SeaScan' implementation programme
nominates a total purchase and delivery time to Tel Aviv of seven
weeks from date of awarding of contract."
41. Negotiations between IAI and Skywest continued. A Mr. Talmi came from
Israel to Perth for discussions with Skywest. Those discussions
took place on
25 and 26 September 1989. Mr. Burns, who was made aware by Skywest of Mr.
Talmi's visit, made arrangements to meet
him during the visit but was unable
to do so because of a pilots' strike. A telephone conference was held
(according to Mr. Giles
on 28 September) and during the course of that
conference, Mr. Talmi said:
"The Westwind 1124s will be totally refurbished to IAI standards,42. Mr. Talmi added that it was hoped to have a memorandum of understanding (MOU) by the end of his visit, but that nothing would be contractually binding until Skywest made an initial payment of $45,000.00 followed by further payments of $45,000.00 per month, the agreement to lapse if those payments were not maintained. This conversation made Skywest and the Commonwealth aware, as did other conversations between Mr. Meeke and ACS representatives, that there were no arrangements between Skywest and IAI at this stage which were binding on either party.
stripped of fuselage fittings, modified to SeaScan standards, then
have specialist equipment and modifications fitted before delivery to
Skywest. IAI will ensure that all modifications are completed and all
overall systems are working to RFT requirements."
43. A meeting held on 16 October 1989 is of particular importance in the course of pre-contractual negotiations. On this date an ACS inspection team, including Mr. Giles, Mrs. Anderson, Mr. Bruce Wingrove of DAS and a Mr. Mann, visited the Skywest facilities in Perth. There is a dispute as to exactly what was said. There was talk of the length of time to be taken from the assumed award of the contract to the time when the aircraft would be ready for service in Australia. That matter of time appears to have been the initial subject matter if not the main subject matter discussed. There was more detailed discussion about IAI requesting 16 months to complete the modification work, or at least not committing itself on paper to completing the modification in a shorter time. Mr. Meeke expressed concern about the availability of the nominated aircraft at US$1.8m, or at all, if a decision to award the contract was not made before the end of the year. It is reasonably clear that Mr. Meeke mentioned that, although the three target towing aircraft were believed to be still in Germany, it was possible that one had left Germany. He also asserted words to the effect that the longer the Commonwealth took to award the contract, the less likely it would be that the three nominated aircraft would be available and the less likely it would be that, if available, the purchase price would remain at US$1.8m each.
44. Mr. Meeke claimed in evidence that he expressly stated that the suitability of aircraft to be supplied in substitution for the three nominated aircraft was dependent upon their availability and also upon what he called their "equivalence". This claim is supported by Mr. van Kann, but only to the extent that his notes (AVK7) record mention by Mr. Meeke at the end of the meeting of "equivalence of TT, i.e. GNS low hours "C", etc.". The claim of Mr. Meeke was denied by Mrs. Anderson in her evidence and by Mr. Giles in his evidence. Mr. Meeke also claims that he told Mr. Wingrove that nonavailability of the nominated aircraft "impacts on the IAI Modification Program". This is denied by Mr. Wingrove in his affidavit.
45. There is evidence that on 10 November 1989, Skywest received from ACS a letter with a draft or specimen contract annexed. The letter warned that no decision for awarding the contract had been made. Little reliance, if any, was placed by either party on the terms of the draft contract . (Neither Mr. Burns nor Mr. Giles appears to have seen it before 16 November 1989). What is of significance is that by early November both parties were looking at the prospect of concluding negotiations in favour of awarding the Coastwatch contract to Skywest. Further Skywest was concerned to arrive at firm and satisfactory arrangements with IAI as to modifications. The Commonwealth became increasingly concerned to satisfy itself that the modification program was technically and financially feasible. In particular Skywest was notified by fax on 8 November 1989 that ACS officers proposed to go to Israel at the same time as the Skywest representatives in order to gain first-hand information on these matters.
46. On 12 November 1989, Mr. Meeke and Mr. van Kann met Mr. Burns and Mr. Giles at the premises of IAI at Tel Aviv airport. Over the next two or three days there were a number of presentations by IAI and inspections of IAI facilities. The Skywest representatives also held meetings with IAI in the absence of the ACS officers. On the evening of 12 November, relations were clearly strained both between Skywest and IAI on the one hand and between Skywest and the ACS officers on the other. By the evening of 14 November the tension had increased. It appears to have arisen at least in part out of the reluctance of IAI to enter into a firm commitment in relation to the modification program and out of the reluctance of the ACS officers to commit the Commonwealth to acceptance of Skywest as the successful tenderer. It is reasonably clear that Mr. Meeke in particular was frustrated by the refusal of IAI to make any firm commitment or give any firm estimate of the expected cost of modification to SeaScan until Skywest was clear about what aircraft exactly it was that Skywest wanted modified. Skywest, on the other hand, could not enter into any firm commitment to acquire any particular aircraft unless and until it knew that it was the successful tenderer. Mr. Meeke expressed concern to the ACS officers that the price of the Westwinds had increased since tender and were increasing. There was mention by both sides of the need for the contract to provide for this eventuality. There is a dispute as to whether anything further of significance was said.
47. Mr. Meeke claimed in his evidence that he informed Mr. Giles at the
meeting on 14 November 1988 that IAI refused to enter a fixed
price
modification contract in the belief that the target towing aircraft were no
longer available and that he told them further
that the modification program
therefore had to remain open ended in order to accommodate the modification of
whatever aircraft might
be acquired. Although this is denied by Mr. Burns, I
think that the probabilities establish that something to this effect was said,
as it represents the facts as they then were believed to be and Mr. Meeke
would be unlikely not to have offered to the ACS officers
some explanation for
the lack of progress in the negotiations with IAI over the modification
contract. However, Mr. Meeke claims
that he went on to say to the ACS
officers:
"You should not be offended about this because it does have a costMr. Meeke claims that Mr. Giles replied:
implication for ACS. Our tender was predicated entirely on the three
German Target Towing Aircraft. The asking price of basic Westwind
jets has firmed significantly and is now in the region of US$2.1m to
US$2.3m. The non-availability of the German aircraft does raise
enormous problems of equalisation."
"Yes, I understand all that and obviously you need to make provisionMr. Meeke replied, according to his own evidence:
in your contract with IAI and you will also need to make provision in
your contract with the Commonwealth for escalation of costs associated
with supply of different aircraft. ... It is important that we try
to finalise arrangements during this visit, recognising that there
will have to be some facility to cover additional costs. .... We
know what is happening with Westwind prices ....."
"That takes care of the basic purchase price of a Westwind, but we areMr. Meeke claims that Mr. Giles responded as follows:
talking of the modified price of a SeaScan, and ..... the loss of
three particular aircraft has implications far greater than the
purchase price of a replacement Westwind. It goes to the very essence
of our arrangements with IAI."
"I understand, but it is important that you finalise your arrangements48. Mr. Burns and Mr. Giles deny that the conversation took place in these terms, although they agree that there was mention by Mr. Meeke of an increase in the price of the Westwinds and mention by Mr. Giles of the need for this to be covered in the contract to be entered into. Mr. Burns does not recall the word "equalisation" being used.
with IAI and we need to satisfy ourselves as part of the tender
evaluation process that those arrangements are finalised."
49. It is also clear that a recurrent theme in this conversation was the difficulty raised by Mr. Meeke about the Commonwealth delaying in awarding the contract and the difficulties that this was likely to cause Skywest. The essential difference in the accounts of the conversation is that Mr. Meeke says that he expressed concern about the likely increase in modification costs which delay was likely to cause and which increase should be of concern to the Commonwealth as should the likely increase in costs of purchase of the nominated aircraft or aircraft in substitution for them. The accounts given by ACS officers are to the effect that the discussion concentrated on the likely increase in the purchase price of Westwind aircraft (whether the three nominated aircraft or other Westwind 1124s to be purchased in substitution) and that there was no reference to increases in modification costs.
50. Mr. van Kann in his affidavit of 7 December 1992 gave an account largely supportive of Mr. Meeke's account. According to Mr. van Kann, Mr. Meeke said that prices were firming, that it was critical to get three aircraft of an acceptable specification for the Israelis and that if Skywest got aircraft that were fundamentally acceptable, there would still be "significant equalisation costs". Mr. van Kann did not keep notes of this conversation. The cross-examination of Mr. van Kann on this conversation was of significance and I refer to it below.
51. On 15 November 1989 on the flight from Israel Mr. Meeke informed the ACS officers that they had "shaken hands" with IAI on the modification contract, that a draft had been prepared for "preliminary consideration" and for signature as soon as Skywest learned that it had been awarded the Coastwatch contract. Mr. Burns expressed his satisfaction with the apparent technical and commercial feasibility of the arrangements so far made.
52. A further meeting took place on 22 November 1989 in Canberra with Mr. Meeke and Mr. van Kann present for Skywest. On this occasion the Commonwealth was represented by Mrs. Anderson, Mrs. Fox, a Legal Officer with ACS and a Mr. Leach also of ACS. There was discussion about the contract and in particular about the provisions relating to a corporate guarantee and to force majeure. Mrs. Fox stated that the guarantee offered in the tender was unsatisfactory. Mr. Meeke stated that one or more of the nominated Westwinds had been sold and that the cost of Westwinds was escalating rapidly. It is likely that he mentioned something further about an escalation clause connected with the price of aircraft, because either Mr. Leach or Mrs. Anderson asked whether Skywest wanted "a one-off capital adjustment or a variation to the daily standing charge". Mr. Meeke was non-committal in his response. Possibly the escalation clause was not as important to Mr. Meeke at that stage as the guarantee and force majeure clause. Drafts of these latter clauses passed between the parties over the next few days.
53. Mr. Meeke claims also that he said that there had to be a provision in the contract covering non-availability of the nominated aircraft, that the substitute aircraft would be more expensive but that he had no idea of the full cost until the substitute aircraft were selected and IAI was able to say "what these aircraft mean commercially under the terms of the modification program". Mr. van Kann played little part in the meeting of 22 November 1989. He made a brief note of what was said. His evidence does not support that of Mr. Meeke on the matter of the modification program. Mrs. Fox, whose evidence I accept, said that there was brief discussion only about the provision in the contract providing for a variation in capital costs to take account of price increases for Westwind aircraft.
54. In a letter to Mr. Meeke of 23 November 1989 (WJM 41) Mr. Granot of IAI expressed resentment at Mr. Giles' interest in obtaining "a breakdown of time schedules and resources to judge whether we can tackle the work." Mr. Granot found the ACS attitude offensive and a contravention of proper tendering practice. However, in a "prevailing spirit of glasnost" he supplied a program and timetable of the various stages of the modification program. It contained no references to equalisation or standardisation or to specific aircraft or types of aircraft.
55. On 24 November 1989 there was a presentation of the tender in Canberra. There were no conversations or statements of significance on that occasion, except that Mr. Meeke or Mr. van Kann remarked that the rise in price of Westwinds (in US dollars) should be off-set by a more favourable exchange rate.
56. On 30 November 1989 Mrs. Anderson telephoned Mr. van Kann and informed him that she expected that Skywest should receive "by Wednesday" a letter of intent indicating that Skywest was to be awarded the Coastwatch contract subject to execution of a formal contract and provision of a corporate guarantee. There is a dispute as to the rest of the conversation. Mr. van Kann claims and Mrs. Anderson denies that there was discussion for the need for provision in the contract to cover increased costs of the aircraft to be supplied. Mr. van Kann claims that he told Mrs. Anderson that the contract required variation "to cover the cost of obtaining Westwinds equivalent to the serial numbers in the tender" and "to provide a mechanism for recovering costs we will incur to get aircraft equivalent to those tendered". Mrs. Anderson denies this part of the conversation. Mr. van Kann's note in exhibit AVK 15T tends to confirm his account.
57. There were further exchanges of faxed messages and documents and other conversations between the parties over the next few days. They were mostly concerned with the matter of the force majeure clause. It was not until 11 December that Mrs. Anderson realised that the draft contract then well into the course of preparation by Mrs. Fox did not include a clause to cover the provision in the tender relating to what she called the capital cost of aircraft. She informed Mrs. Fox of the omission and provided Mrs. Fox with a copy of the relevant extract from the tender. Mrs. Fox used the extract as what she described as a "starting point" for drafting an appropriate clause for insertion into the contract. The question remained outstanding whether Skywest wanted a lump sum payment or an adjustment to the daily standing charge fixed by the contract.
58. In the meantime, negotiations were continuing between Skywest and IAI and
on 7 December 1989, IAI sent by fax a draft modification
agreement in which
the "base price" to be charged for the modification of the three aircraft was
stated to be US$3.535m. Provision
was made for "extra work" and a total
price. Mr. van Kann proposed certain changes to the draft including a clause
whereby IAI would
agree to advise Skywest "on the suitability of particular
Westwinds that SWA may wish to purchase". That proposal was rejected by
IAI.
The recitals to the draft agreement provide evidence of the presumed intention
of Skywest at the time. They include the following:
"WHEREAS, in the SWA Proposal, SWA proposes to perform certain of the59. There is no reference in the draft modification agreement to equalisation costs, or equivalence, or anything of that nature. There is no provision about the aircraft to be modified being identical or similar to each other or identical or similar to the nominated aircraft. There is no reference to the serial numbers of the nominated aircraft. The provisions of the draft modification agreement were mostly repeated in the modification agreement later entered into between Skywest and IAI after the Coastwatch contract was executed. The modification agreement is discussed below.
Project services through the operation by SWA of three (3) SWA-owned
Westwind 1124 Aircraft which shall have been modified and adapted for
the Project by, inter alia, the installation therein of certain
equipment; and
WHEREAS, at the date hereof SWA does not own or possess the Westwind
1124 Aircraft referred to in the SWA Proposal, but intends to purchase
three (3) used, airworthy Westwind 1124 Aircraft from a third party in
the event that SWA is awarded the prime contract for the Project;"
60. On 12 December 1989 there was a further conversation between Mr. van Kann and Mrs. Anderson. It is likely that the conversation was initiated by Mrs. Anderson in order to get the information sought by Mrs. Fox. Mr. van Kann took the call on Mr. Meeke's mobile phone at Matilda Bay. It was suggested by one or other of the parties to the conversation that an adjustment to the daily charge might be preferable from the point of view of Customs who might have less difficulty in having it approved by the Department of Finance. Mr. van Kann claims that Mrs. Anderson made that suggestion. Mrs. Anderson claims that it was Mr. van Kann who made the suggestion. However, Mr. van Kann also claims that he told Mrs. Fox that Customs should appreciate that it was not just the purchase price of the aircraft "that was in question, there was also the problem of equivalence" and that "if the target towing aircraft are gone, this could end up in a fairly significant escalation". Mrs. Anderson denies this latter part of the conversation.
61. Mr. van Kann's note, made after the conversation, is as follows:
"JA wanted to know if we meant A/C cost adjustment to be a one off62. The note supports Mrs. Anderson's version of that part of the conversation relating to the benefit to the Commonwealth of a daily charge. It supports Mr. van Kann's mention of "the problem of equivalence". A matter of potential significance is Mr. van Kann's mention to using the opportunity to "slide in" the reference to "equivalence". I deal with it later under the heading of "Estoppel: the facts".
payout or an adjustment to DSC.
Answered that adjustment to DSC was much better for Commonwealth and
we presumed that's what Commonwealth wanted.
SWA was happy with that.
JA implied that Julie Fox had "foxed it up" (again).
I used the opportunity to "slide in" the fact that the adjustment
would have to be worded such that it covered the escalation of an
"equivalent" A/C to the three S/N's nominated. That meant
equipment/age/condition/etc. The TT's may be gone. Expect
significant rise as market had firmed. People were starting to find
out about Coastwatch WW's."
63. Also on 12 December 1989 Mrs. Fox sent Skywest a faxed copy of a draft of clause 4A which dealt with the subject of interest but not with depreciation. There were further conversations and exchanges of faxed messages between her and Mr. van Kann over the question whether clause 4A should also deal with the costs of depreciation. Eventually, on 13 December 1989 Mrs. Fox and Mr. van Kann agreed over the telephone on the terms of clause 4A as it was subsequently incorporated into the contract.
64. On 13 December 1989 the Commonwealth sent to Skywest by fax a letter advising Skywest that it had been selected as the contractor for Tasks 1, 2 and 4 of the Coastwatch project. On the same day, Mr. van Kann learned that aircraft serial number 297 had been sold and was no longer on the market. (Whether he learned the news before or after agreeing to the final terms of clause 4A with Mrs. Fox does not emerge in the evidence. Mr. Meeke may have received the news on the previous day. It arrived by fax dated 12 December 1989 from Mr. Hans Kirchmaier.) At 2.25 p.m. on 13 December Mrs. Anderson left Canberra for Perth with two "originals" of the contract in her possession. Mrs. Anderson's instructions from Mr. Giles were to deliver the two originals to Skywest for execution, to initial each page herself at the time of such execution, and to return with the documents so executed in order for the Comptroller General of Customs to execute both documents on behalf of the Commonwealth, with a view to the Minister making an announcement on Monday, 18 December 1989.
65. At the time of Mrs. Anderson's departure from Canberra, the transmission of the content of the contracts to Perth by means of the facsimile process was not yet complete but it was completed at 6.40 p.m. EST with the result that Skywest had in its possession a faxed copy of the "final form" of the contract some time in the late afternoon or early evening of 13 December 1989. It included clause 4A. The accompanying letter stated that if any amendments were required "they can be by pen" and that a clean copy would issue in due course.
66. Mrs. Anderson arrived at Perth airport at about 1.30 a.m. WST on Friday, 14 December 1989. She was met by Mr. Davin (Skywest's general manager) and driven to her hotel. She was collected by Mr. Davin at 7.30 a.m. and driven to the Burswood Hotel where Skywest had arranged for breakfast to be taken before a meeting immediately afterwards in the adjoining convention centre. At the breakfast Mr. van Kann informed Mrs. Anderson that the contract could not be signed "in its present form" as Skywest had been unable to arrange for the corporate guarantee with its associate company TNT. Mr. van Kann produced documents from TNT, one a letter dated 5 December 1989 in which TNT indicated its unwillingness to give the guarantee sought, the other a "letter of comfort" which was offered by TNT in place of a guarantee and which Mr. van Kann said TNT "had used previously". Mrs. Anderson expressed her concern that these had not previously been disclosed to ACS. Mr. van Kann expressed his confidence that "it can be worked out".
67. Examination of the contract clause by clause took place at the convention centre and the meeting then adjourned to the Skywest offices. Mrs. Anderson was provided with facilities to telephone Mr. Burns in private. She explained to him the outstanding problem of the guarantee and was instructed by Mr. Burns to remain by the telephone while Mr. Burns and Mrs. Fox attempted to resolve it. Discussion about the guarantee resumed in the Skywest office. Numerous telephone conversations took place between various of the people in Perth on the one hand and others including Mr. Burns in Canberra and TNT representatives elsewhere on the other. Mr. Meeke joined in these discussions. Eventually consensus was reached on the matter of the guarantee. Mr. Meeke had a letter typed which represented that consensus. A copy of that letter was faxed to Mr. Burns at 4.24 p.m. WST. After a telephone conversation between Mrs. Anderson and Mrs. Fox, Mrs. Anderson and Mr. Davin made alterations to the originals of the contract whereby clause 18 was amended to extend the date for producing the guarantee from "on or before the effective date" to "within 21 days of the effective date". Clause 18 A was deleted, annexure F was also deleted and other consequential and minor alterations were made.
68. The discussions just mentioned concerning the guarantee were of considerable concern to both parties. At some stage there was discussion during the course of the day between Mr. Meeke and Mrs. Anderson in the absence of all the others. Whether it took place incidentally to a coffee break or whether Mr. Meeke called Mrs. Anderson out of the meeting into another room is not of great importance. Mr. Meeke was in any event the initiating party. The exact terms of the conversation are strongly in dispute. Mr. Meeke claimed in evidence that he asked for and obtained a clarification from Mrs. Anderson about the meaning of clause 4A. His evidence was that she responded by telling him that, provided Skywest could substantiate its claim by invoices and documentation, clause 4A was designed to cover any increase in the cost of conversion to SeaScan over and above the costs anticipated at the time of tender. Mrs. Anderson's version of this part of the conversation is that in response to a question by Mr. Meeke she told him that the contract "covers increases in purchase price but does not allow for modifications after purchase" and that Mr. Meeke then abandoned that line of inquiry. The conflict between the evidence of Mr. Meeke and Mrs. Anderson is of considerable importance and is discussed under the heading "Meeting of 14 December 1989".
69. On Saturday, 15 December 1989 Mrs. Anderson took some substitute pages of the contract which ACS had delivered to her that morning to the Skywest offices. These were presumably clean copies of some of the pages that had been the subject of amendment. She inserted them into the originals still in the possession of Skywest. The counterpart contracts as they became were then executed for Skywest by Mr. Martin, director, and Mr. Meeke, director, and the company seal was affixed in the presence of Mr. Davin who attested as a witness.
The Coastwatch contract: A summary of provisions
70. References under this heading to "the contract" are to the Coastwatch
contract. The contract commences with the following recitals:
"A The Commonwealth has a requirement for the supply of suitably71. Despite the reference in the recitals to "the supply of ... aircraft ... for ... use by the ACS" and the "offer to supply aircraft .... to the Commonwealth" the contract is clearly a contract for the supply of services in the nature of aerial coastal and offshore surveillance operations..
equipped aircraft, pilots and observers available for full time
use by the ACS in coastal surveillance of various areas of
Australia and areas adjacent thereto.
B The Contractor has submitted an offer to supply aircraft, pilots
and observers to the Commonwealth and to conduct coastal
surveillance operations and associated operations of various areas
of Australia and areas adjacent thereto as required by the
Commonwealth.
C The Commonwealth has accepted, upon the terms and conditions of
this contract, the Contractor's offer to supply the aircraft,
pilots and observers and to conduct the coastal surveillance
operations and associated operations of various areas of Australia
and areas adjacent thereto as required by the Commonwealth."
72. The scope of the contract is defined by clause 3 as follows:
"3. Scope of Contract73. "Services" is defined in the definition clause, clause 1, to mean "the provision of the aircraft, pilots and observers to conduct coastal surveillance operations and/or logistical support operations for various areas of Australia and areas adjacent thereto the subject of this contract, including (without limitation) the services to be supplied pursuant to clause 9". Clause 9 is concerned with special services and may be ignored for the purposes of this matter.
The contractor shall supply the Services in accordance with and upon
the terms and conditions of this Contract for the Service Fee, the
Special Service Fee and such other amounts as are payable under the
Contract."
74. Clause 4 bears the heading "Commencement of Supply of Services" and deals with the date of commencement of the supply of particular services listed in Schedule 5 of the contract.
75. Clause 4A is headed "Adjustment of Fixed Costs Component" and has already been set out in these reasons.
76. Clause 5 provides that "the Service Fee payable in respect of each Particular Service supplied from each Operational Base is a variable Service Fee".
77. Clause 6 provides for the variation of the Service Fee.
78. The particular services to be supplied as identified in Schedule 5 include Task Two which is defined as "the supply of aircraft, equipment, pilots and observers and the conduct of surveillance and logistic support as specified in annexure B". Schedule 5 fixed 1 May 1991 as the commencement date for Task Two. Annexure B sets out in detail the scope of the task, which is essentially the conduct of aerial surveillance operations by electronic and visual search of the off-shore area and other areas as nominated by the contract authority (defined to mean the National Manager of Coastwatch). The aircraft are to be used exclusively for the aerial surveillance operations required by Task Two. One aircraft is to be provide at each of three operational bases, namely Broome, Darwin and Cairns. The technical requirements and capacity of each aircraft and its equipment are set out in para 5 of annexure B to the contract. Other provisions of annexure B include the requirements as to aircraft livery, air crew, observers, pilot qualification, surveillance training, and reporting procedures.
79. The service fee is calculated in accordance with a formula set out in para. 1.1(dd) of the contract. The formula includes a standing charge fixed by Schedule 2. The standing charge is made up of cost components as set out in Schedule 3. They include a fixed cost component which in turn, for Task Two, varies for each of the operational bases, but which is in the order of 80 per cent of the standing charge or about A$5,400.00 for each base per payment period of 14 days. In addition, there are components of the standing charge based on salary rates for air crew and insurance costs.
80. Provision as to the procedure to be followed for payment of the Service Fee by the Commonwealth and the time fixed for such payment is made for in clause 7.
81. The contract imposes an obligation in clause 15.2(b) to use only aircraft and equipment which comply with the specification and requirements specified in the annexures.
82. Clause 18 (which was the clause amended at the meeting of 15 December 1989) provides that within 21 days of the date of executing the contract the contractor shall produce and hand over to the contract authority a guarantee and indemnity substantially in the form set out in annexure D, executed by a bank or other reputable financial institution approved by the contract authority (such approval not to be unreasonably withheld).
83. Clause 20 deals with force majeure. It is sufficient to say that its effect is that in the event of force majeure resulting in the contractor failing to perform any of its obligations under the contract, the contractor shall be excused from performing that obligation but where the failure continues for more than 30 days, the Commonwealth is entitled to treat the failure as default on the part of the contractor on the giving of notice to that effect to the contractor. The clause also provides that where there is a failure resulting from force majeure to provide a particular service from an operational base, the Commonwealth is not liable to pay the service fee or any other cost or charges in respect of the supply of that particular service from that operational base from the time that the contractor is unable to provide the particular service from that operational base.
84. Clause 28 provides that the contractor shall not subcontract the supply or performance or all or any part of the services to be supplied.
85. Clause 32 provides that neither party may assign or transfer any of its rights or obligations under the contract without the prior consent of the other party.
86. Clause 37 (of particular importance in the present case) is an entire
agreement clause expressed in the following terms:
"The provisions of this contract represent the entire agreement87. Certain amendments to the contract were made by letter dated 30 January 1990 signed on behalf of both parties but are not relevant for present purposes.
between the parties and contain all the understandings, statements and
representations, whether orally or in writing, between the parties to
the exclusion of all other understandings, statements and
representations."
88. The contract is therefore to be seen as one essentially concerned with the supply of services for which the supply of aircraft is necessary but incidental. The meaning of the word "supply" in the contract differs according to whether the reference is to supply of services or to supply of aircraft. The supply of services is to be made direct to the Commonwealth and is subject to a certain measure of control and supervision by the Commonwealth. The aircraft, on the other hand, are not supplied to the Commonwealth for its use but supplied by Skywest to be employed and utilised by it in supplying the services.
89. Apart from clause 4A there is no mention in the contract at all of purchase of aircraft by the contractor. There is no express provision that the contractor be the owner of the aircraft supplied. It is conceivable that but for clause 4A the contractor could comply with its obligations by supplying aircraft which it had not purchased but of which it had possession and control pursuant to some licensing or leasing arrangement with the owner. Such an interpretation of the contract, disregarding the effect of clause 4A, would not seem to conflict with the prohibition against subcontracting in clause 28. However, with the insertion of clause 4A it is clear that, without purchase of the aircraft by the contractor, there can be no claim for, or more precisely no notice of, variation to the fixed cost component of Task Two. The insertion of clause 4A therefore introduces an ambiguity into the contract as to whether the supply of aircraft requires purchase by the contractor apart from ambiguity as to the term "aircraft" itself. That provides further support for the admission of extrinsic evidence as to the surrounding circumstances in relation to the phrases "moneys borrowed to purchase aircraft", "purchase price per aircraft" and "purchase price" as those phrases appear in clause 4A. This aspect is discussed more fully below.
Narrative of events: post contract
90. Having incurred the contractual obligation to commence the operation of
Task Two, Skywest set about securing the supply of aircraft
for that purpose.
ACS set up a contract review committee. Mr. Meeke said in his evidence that
on 20 December 1989 he rang Mr. Burns
to thank him for his efforts in relation
to the execution of the contract and mentioned that the "trio of aircraft
tendered were
no longer available as a trio", adding that Skywest needed to
move quickly into the market place. He said that Mr. Burns responded
by
saying that it was "a good decision" to move quickly with regard to the
purchase of aircraft in the United States as there was
a deadline to get the
aircraft to IAI, and that ACS would "keep a close eye on progress". Mr. Burns
agrees with Mr. Meeke's account
except that he does not recall being told
anything about the trio of aircraft being no longer available. Mr. Burns
denies being
told anything about nonavailability of the nominated aircraft in
this or any other conversation "during or after the tender evaluation
process".
91. Mr. Meeke also gave evidence that although he was aware both of the absence of a concluded contract with IAI and the need for the delivery of aircraft to IAI by 22 March, 6 April and 22 April he did not in fact move quickly into the market place for fear of putting pressure on the prices.
92. On 3 January 1990 Mr. Meeke and Mr. Davin proceeded to the United States. Before their departure Mr. Meeke spoke to Mr. Burns and told him of his intention to buy Westwinds in the United States where prices appeared favourable. Mr. Burns told him to "get over there before too many people know you are after Westwinds".
93. In the United States Mr. Meeke and Mr. Davin inspected several Westwind 1124 aircraft. Whether or not before leaving for the United States he had abandoned any intention or hope of acquiring any of the aircraft nominated in the tender, Mr. Meeke came to the conclusion whilst in the United States that two of the several aircraft inspected there (neither of which were aircraft nominated in the tender) were both available and suitable for Coastwatch purposes. Negotiations were entered into and contracts concluded for the purchase of such aircraft from their owners. The first agreement was dated 8 January 1990 for the purchase of aircraft serial number. 253 from Mike Donahue Aviation at a purchase price of US$1.91m for delivery at the IAI premises in Tel Aviv. The second agreement was dated 10 January 1990 for the purchase of aircraft serial number 272, from Turnberry Charters Inc. at a purchase price of US$1.92m for delivery at Fort Lauderdale, Florida. (A third aircraft, serial number 259, was not the subject of purchase agreement until 6 April 1990. It is convenient to refer to all three agreements as "the vendor purchase agreements".)
94. However, for reasons connected with the requirements of US and Israeli aviation authorities, it was found desirable by Skywest that the aircraft in question and their ownership be registered and certified in the USA before being taken to Israel. Such registration and certification was not possible unless the aircraft were owned by a US resident company. Hence the vendor purchase agreements each provided that the purchase was to be by Skywest or its nominee. The responsibility for identifying the nominee was left by Skywest to a Mr. Quinlan of Ansett Industries Australia Leasing Ltd (AIAL), a US incorporated and resident company, but one which was related in someway to Skywest.
95. Either shortly before or shortly after his departure for the USA the information available to Mr. Meeke convinced him that for practical purposes none of the nominated aircraft were available for purchase.
96. File notes made by Mr. Meeke during his trip to the USA indicate that he was concerned to locate Westwinds which were available at a purchase price not higher than US$2.0m per aircraft. The limited availability of Westwinds at that price level left little opportunity to shop around for aircraft which (apart from being within the serial number range) were similar to the nominated aircraft or similar to each other or in a condition which would require less rather than more modification work to bring them to SeaScan condition. The file notes indicate Mr. Meeke's concern that the nonavailability of the nominated aircraft (which were by then the subject of fraud charges and other litigation in the USA) meant that there was a loss of the "standardisation factor" and that, while the "budget price of standardisation was nil" in the case of the nominated aircraft, that was no longer achievable.
97. Mr. Meeke returned from the United States on 14 January in order, as he said, "to avoid further hardening of prices". Upon his return Mr. Meeke rang Mr. Burns to say that two Westwinds had been purchased in excellent condition with low hours and they would soon be on their way to Israel. He explained that a third aircraft was not purchased at that stage because the market was rising. It was intended that the third aircraft be purchased within "a few weeks".
98. On 22 January 1990 Skywest executed a contract with IAS for modification of three aircraft to SeaScan for a total base price of US$3.535m for all three aircraft ("the modification agreement", Exhibits M, WJM 57). The only significant difference between the modification agreement as executed and the draft received by Skywest on 7 December 1989 is that the modification agreement contains an additional clause (Art. IB) which provides that IAI will assist Skywest with information on any aircraft which Skywest contemplates purchasing, but that Skywest remains responsible for ensuring that the aircraft comply with Exhibit D. The modification agreement contains an "entire agreement" clause, Art. XV(F).
99. Exhibit D to the modification agreement contains eleven paragraphs. It does not make any reference to the nominated aircraft by serial number or otherwise, or to "equivalence" or "equalisation" or "standardisation". Its general effect apart from para 1. is that the aircraft to be modified are to be free of defects such as corrosion, damage, fuel leaks or cracked windows. Para. 1 provides that "Aircraft should be a standard model 1124 Westwind 1 and should preferably bear serial number 250 or higher, and have no special or non-standard modifications or installations which may adversely affect its performance, flight characteristics, systems or weight compared to (those) .... of the standard model 1124 Westwind aircraft."
100. There is nothing in the modification agreement which obliges Skywest to deliver for modification the nominated aircraft or aircraft which are identical or substantially similar to the nominated aircraft or to each other. In other words, the contention of Mr. Meeke that the arrangement with IAI for modification was "predicated" on modification of the nominated aircraft or target towing aircraft or aircraft identical to the nominated aircraft or to each other is not supported by the draft modification agreement which Skywest had contemplated before the Coastwatch contract nor by the executed modification agreement itself which was executed after the Coastwatch contract and when Skywest had already entered into two vendor purchase agreements for the purchase of substitute aircraft and was contemplating entering into a third.
101. There appears to have been little significant contact between Skywest and ACS between early January and 20 February 1990, although Mr. Giles said in his evidence that there were several meetings over this period. In any event, on that date there was a meeting at Jandakot Airport in Perth for the purpose of launching Task One of the contract. Mr. Meeke was accompanied by Mr. Conlon, who had been appointed national manager of Coastwatch in December 1989. The evidence does not reveal the exact date. At the date of the contract Mr. Conlon may or may not have taken over from Mr. Burns who had been acting national manager.
102. Mr. Meeke said in his affidavit of 7 December 1992 that there was discussion between himself and Mr. Conlon and Mr. Burns at the Jandakot meeting about Task Two and in particular about the likely overall costs increase of A$700,000.00 and of A$1m for interest and depreciation, to which Mr. Conlon replied that the increase "could be handled internally with Finance". Mr. Burns once again raised the matter of whether there should be a one off payment in May, to which Mr. Meeke replied that he would be happy with either adding "you are aware that we found it necessary to use a third party for acquisition of the aircraft".
103. Mr. Burns has no recollection of this conversation.
104. Mr. van Kann said in his affidavit also of 7 December 1992 that the matter of purchase through a US group company from which Skywest would purchase the aircraft after their arrival in Australia was raised with Mr. Conlon at dinner that night. He said that Mr. Conlon stated that "under clause 4" Skywest must provide substantiating information and added that ACS would not accept "mark-ups between group companies". Mr. van Kann assured him that there would be no profits or mark-ups and that there would be documents "to support every dollar". Mr. van Kann also told Mr. Conlon that the costs incurred during the modification program would be paid by the US companies, who would seek recovery from Skywest.
105. Mr. Conlon said in his affidavit of 16 August 1993 that he met Mr. Meeke for the first time at the February meeting at the premises of Skywest and was invited for an informal dinner that night. He said that at that time he had not read the Coastwatch contract but "was aware in a general way of a right in the plaintiff to make a claim in respect of increased costs of acquiring the Westwind aircraft". He denied making any specific reference to clause 4A, which, he said, was "not a term in my vocabulary". He agreed that he said something about ensuring that the purchase price was not inflated by changing the ownership of the aircraft. He denied being told by Mr. Meeke or anyone else from Skywest about modification program or a conversion program being a cost claimable form the Commonwealth.
106. A file note by Mr. Meeke dated 20 February 1990, and prepared presumably after the meeting at Jandakot but before the dinner, tends to confirm some of the evidence of Mr. Meeke and Mr. van Kann. A file note dated 22 February prepared presumably after the dinner does likewise and in particular notes that Mr. Meeke stated that "based on the purchase of Aircraft 1 and 2 the total capital cost increase would be A$2-3 million or $700,000 to $1.00m per annum". However, there is nothing in the file notes about reference by the Skywest representatives to increased costs of modification and nothing about any reference to clause 4A at all.
107. On 6 April 1990 Skywest entered into an agreement with Northern Jet Inc whereby Skywest or its nominee agreed to purchase a third Westwind, serial no. 259, at a purchase price of US$2.2m (on 20 April amended to US$2.083m). Mr. van Kann said that on 2 April 1990 he sent to Mr. Giles copies of all three vendor purchase agreements. Apparently at that stage the third vendor purchase agreement was unexecuted. In any event, it is clear that the agreement had been reached by this time between Skywest and the three vendors and that ACS received copies of all three vendor purchase agreements, although the purchase price was whited out. Mr. van Kann said that this was done "for commercial reasons". Mr. Giles, on the other hand, said that because Schedule 6 of the Coastwatch contract required proof of purchase by 18 April he assumed that the copies of the vendor purchase agreements were put forward as such proof and that the purchase price was "closely related" to US$1.8m. In any event, it is clear that ACS remained ignorant of the price paid or payable for the Westwinds pursuant to the vendor purchase agreements and would not have been in a position to relate that price to the condition of the Westwinds at the time of the purchase agreements.
108. On 28 June 1990 TPE, of Bellevue, Washington, USA as vendor entered into
a contract with Skywest as purchaser (the TPE purchase
agreement) which
provided that "the purchaser will purchase from the vendor the following three
(3) Israel Aircraft Industries Ltd
Westwind 1124 aircraft fully converted to
the SeaScan maritime patrol variant by Israel Aircraft Industries Ltd". The
aircraft were
identified by serial numbers 253, 272 and 259. The TPE purchase
agreement provided that the vendor was to deliver each of the aircraft
(which
were already at the IAI premises) to the purchaser at the IAI premises on the
respective dates 19 January, 2 March and 2 April
1991. The TPE purchase
agreement provided for a purchase price for each aircraft of approximately
US$5.1m which was made up of three
amounts. For example, the purchase price
of "Aircraft No. 1" was stated to be calculated as follows:
"US$109. The purchase price for each of the other two aircraft was stated to include the same amount of US$3.022m for conversion costs.
Contract price to the vendor for acquisition $1,910,000.00
Interest paid or payable by the vendor to
30 June 19990 $88,041.66
Conversion cost to SeaScan Maritime
Patrol (subject to escalation)" $3,022,000.00
Purchase price of aircraft No.1 $5,020,041.66"
110. The TPE purchase agreement further provided that the title to each aircraft would pass at the time of delivery by the vendor to the purchaser of a Bill of Sale generally in the form annexed to the agreement. The TPE purchase agreement further provided that the purchaser was to "stand in the stead of the vendor in respect to the purchase by the vendor of the aircraft" and that the vendor assigned to the purchaser "each and every of its rights pursuant to the vendor's contract for the purchase of any of the aircraft so that the purchaser shall be entitled in it sown name or in the name of the vendor to prosecute any claim or entitlement to protect or further those rights".
111. At this point it may be noted that there is no evidence that Skywest did anything to inform the vendors of the aircraft that it nominated TPE as its nominee under the vendor purchase agreements.
112. It may also be noted that, whereas under the vendor purchase agreements the purchase price to Skywest or its nominee was about US$1.9m per aircraft, under the TPE purchase agreement, the purchase price to Skywest was about $5.1m per aircraft of which $3.022 was attributable to the anticipated cost of conversion to SeaScan. Further, whereas the cost of modification anticipated by Skywest at the time of tender was US$.68m per aircraft, it had risen to US$1.2m per aircraft (US$3.53m for all three aircraft) at the time of the modification agreement and rose further to US$3.022m per aircraft at the time of the TPE agreement.
113. With arrangements at last firmly in hand, Mr. Meeke and Mr. Davin proceeded to Israel on 18 July 1990 and Mr. Conlon and Mr. Giles joined them. Nothing of significance however appears to have occurred during this visit, which lasted until 26 July 1990. The aircraft had arrived there by that time (according to the TPE purchase agreement) and presumably modification work was under way.
114. On 4 September 1990 there was a meeting in Canberra of the Contract Review Committee and Skywest representatives. Mr. van Kann spoke of preparing details of costs for a clause 4A claim. During the course of the discussion Mr. Burns, according to his own affidavit, asked "Is it possible to obtain some figure on the extra costs associated with the purchase of the Westwinds?" (emphasis added). Mr. van Kann replied that not all the documentation was yet at hand. Mr. Janesco said that "a partial claim was no good" and that Skywest would need to be careful with the documentation because ACS could cross check the figures submitted for the clause 4A claim with figures obtained by ACS in the export/import documents.
115. The following day Mr. Burns dictated a minute to be placed on the ACS
file. The minute is marked "For the attention of The
Manager, Resources
Management". It also bears a hand written reference to Mr. Giles and may be
taken to have been intended for the
attention of Mr. Giles also. The minute
is headed, "Additional cost of SeaScans" and refers to the variation to the
fixed cost component
"payable in relation to the SeaScan jets". It
continues:
"This variation was designed as a once only adjustment to take account116. The document (the Burns minute) goes on to anticipate that the approximate cost increase translated into daily standing charges represented an actual increase of $2.5m plus interest over the five year life of the contract and that whilst documentation was not yet in hand to support the claim, there would be a need to seek additional Commonwealth funding of $2.5m (with no change to the standing charge) or increased funding for the annual standing charge of approximately $1m per year.
of the difference between the actual cost of purchase and modification
of the aircraft and the tendered cost made some 18 or so months
earlier." (Emphasis added.)
117. The significance of the Burns minute is discussed below. It did not become known to Skywest until after discovery in these proceedings.
118. A further meeting took place in Perth on 26 October 1990 when there was further discussion of a proposed notification under clause 4A. Again, Mr. Janesco told Mr. van Kann there was no point in furnishing a draft of the claim until the documentation was complete.
119. On 29 November 1990 Ansett Industries Leasing Inc. (AILI) of the same address in Bellevue, Washington, entered into an agreement as vendor with TPE as purchaser, to sell the three aircraft serial numbers 253, 272 and 259 to TPE (the AILI purchase agreement). This is a curious document. It fixes as the completion date for the sale a date to be notified by the purchaser "such date to be no later than the date upon which the purchaser is obliged to sell the relevant aircraft to Skywest under clause 5 of the (TPE purchase agreement)". It fixes the purchase price as the amount notified by the Vendor "being an amount equal to the purchase price paid by the Vendor to the Purchaser (sic) to acquire the relevant aircraft."
120. As far as I am aware, there is no evidence that AILI ever paid a purchase price to TPE, or ever acquired the aircraft from TPE or from anyone else. Although the AILI purchase agreement recites that "the vendor owns the aircraft" the evidence about how AILI acquired ownership is incomplete and inconclusive. Although there are allegations in the statement of claim about various bills of sale, the evidence supporting those allegations is also incomplete. I do not understand how and when and in what amounts payment was made to the respective vendors in discharge of Skywest's liability under the vendor purchase agreements. It may be that little turns on this aspect but it may be of significance on the question of the "purchase price paid for aircraft" by Skywest within the meaning of clause 4A, a matter which is discussed later.
121. By about this time there was growing tension in the Middle East with regard to the events which led to the outbreak of the Gulf War in January 1991. By 14 January 1991 one of the aircraft had been modified to SeaScan and had been ferried to Perth and was awaiting certification by Australian authorities. Another was with IAI in Tel Aviv in a condition where it could be flown, if necessary. The third was in the course of modification and could not be put in a condition where it could be flown for some months.
122. The direct military threat posed to Israel and to the IAI factory at Ben Gurion Airport in particular caused considerable apprehension at Skywest. Insurance rates on the aircraft rose steeply. The only aircraft which was in a condition to be flown was ferried to Zurich for safe keeping at Skywest's expense. The work on the other proceeded nonetheless.
123. On 24 January 1991, the Contract Review Committee and Skywest representatives met once again. By that time the pressures caused by the Gulf War had eased. Mr. van Kann informed the meeting that the preparation of a clause 4A claim was well advanced and that it was, "significantly higher than previously indicated" and was likely to require a capital adjustment in the order of A$5.5m. According to Mr. van Kann, Mr. Burns said that he was "very pleased" and that the submission caused "no concern" and would go straight to Attorney-General's and Finance once the final claim was received. Mr. Burns reiterated that as long as the claim was properly based, it was of no concern to ACS whether there was a one off capital payment or an adjustment to standing charges. At this time it also became obvious that the modification costs, holding costs and costs of ferrying the aircraft were likely to have increased substantially as a result of the Gulf War. There were several conversations between Mr. Burns and Mr. Meeke on what was called "the Gulf War Costs". Mr. Meeke argued that the Commonwealth ought to bear at least some of the Gulf War costs. Mr. Burns' response was that, whilst the Commonwealth did not propose to take action for any delay or non-performance on the part of Skywest which was attributable to the Gulf War, neither would the Commonwealth pay for increases in costs so caused, such as the highly escalated cost of insurance whilst the aircraft remained in Israel.
124. According to Mr. Meeke, he informed the meeting that although Skywest had not been invoiced for the aircraft, ACS had seen copies of the vendor purchase agreements and knew that the Westwinds acquired were more expensive than the three nominated aircraft (although the copies furnished to ACS had the purchase prices whited out). Mr. Meeke claimed that he also said that the increase in costs were presently quantifiable at about US$2.4m per aircraft and that he would be comfortable with a letter recording this. He stated that Mr. Burns responded by saying "that's fine", that Mr. Burns was shown a letter of that date and that Mr. Burns commented thereon "that's perfect".
125. There were further conversations about the Gulf War costs and exchanges of letters on 5 and 6 February 1991 and Mr. Burns informed Mr. Meeke that, although Skywest had no entitlement under the force majeure clause, "I'm sure you know how you can recover those costs".
126. On 11 February 1991, ACS wrote to Skywest stating that it would not terminate Task Two under clause 20 of the contract and confirmed Skywest's advice that two aircraft would be available to commence service in Australia on 1 May 1991 and the third aircraft to commence on 31 May 1991. The same letter varied the date for commencement of Task Two from 1 May 1991 as fixed by Schedule 5 of the Coastwatch contract to 1 July 1991.
127. The claim under clause 4A foreshadowed in some of these meetings was eventually made in letters from Skywest delivered to ACS on 11 June 1991 and was supplemented by a further two letters delivered on 8 July 1991. On 14 November 1991, the claim as lodged was rejected by ACS. A fresh claim was invited. On 25 November 1991 the present proceedings were commenced.
The meeting of 14 December 1989
128. First I should state that I do not think that the discussion which took
place between Mr. Meeke and Mrs. Anderson on 14 December
1989 immediately
before the execution of the contract is admissible as surrounding
circumstances to aid in the interpretation of
the contract. It does nothing
to resolve the question whether the presumed intention of the parties in
clause 4A was directed towards
modified or unmodified aircraft. Insofar as it
encompasses the subjective understanding of the persons concerned as to the
meaning
of clause 4A it is clearly inadmissible. Its admissibility in the
claim by Skywest based on estoppel is another matter. For the
moment I will
assume that it is admissible.
129. Mr. Meeke was the chief witness for Skywest. His evidence was challenged in several respects. There were some internal inconsistencies in his own evidence and some conflict between his evidence and the evidence of other witnesses called for Skywest. Mr. Meeke is a successful, experienced and intelligent business manager. Nevertheless, it was remarkable that in some instances his explanation of inconsistencies was somewhat glib and implausible and on occasions he was curiously reluctant to admit the obvious if it was harmful to Skywest's case. He seemed particularly concerned to answer questions in a way most favourable to Skywest. I recognize the limitations that need to be placed on an assessment of the credit of the witness by observations as to demeanour and the like. Such observations are subjective and formed as a result of impression. They hardly lend themselves to rational analysis. However, where these matters play a part, they should be recognised and articulated. Hence, I have to state that in many respects, I did not find Mr. Meeke an impressive witness. There are particular issues on which Mr. Meeke's evidence was evasive or contradictory. Some of those issues turn out to be in the end of little consequence and much of the evasive nature of his evidence may be explicable by what appeared to me to be a persistent attempt to put a most favourable gloss on events which are established independently by other evidentiary material or which are not in issue. Further, it must be acknowledged that Mr. Meeke's evidence, both oral and on affidavit, ranged over a very wide area indeed and his evidence on a great deal of it has to be accepted. However, on one issue in particular there is such a strong conflict between Mr. Meeke's account and the account of the only other witness, Mrs. Anderson, that there can be no room for simple error or lack of memory or an unconscious reconstruction of events in a light favourable to Skywest. Indeed Mr. Meeke agreed in cross-examination that there was "no question" that either he or she was telling lies on that issue. It is an important issue, one on which Skywest's case in estoppel is founded, namely the conversation between Mr. Meeke and Mrs. Anderson on 14 December 1989.
130. I formed the impression that Mrs. Anderson was endeavouring to tell the truth to the best of her ability although she too was somewhat guarded in her attitude. However, even putting aside the more favourable impression given by Mrs. Anderson as a witness than that given by Mr. Meeke, I think that there are several reasons why, independent of credit, her evidence should be preferred to his. I return to the two competing accounts.
131. Mr. Meeke said in his affidavit of 7 December 1992 that he made a
handwritten note of the conversation immediately after it
occurred. He did
not have the note typed. The note reads as follows:
"Discussions with J.A.132. Having refreshed his recollection from this note (without leave), Mr. Meeke gave detailed evidence in his affidavit of the contents of the conversation. However, no matter of substance was raised beyond what was contained in the note. According to the affidavit, part of the conversation was as follows:
. Consider ACS' behaviour on corp g'tee to be very bad form -
increasing our costs well beyond the levels costed in our tender.
. Force majeure really doesn't offer much commercial comfort.
SWAV seems to be having to pay the price for the Amman saga - in a
vice]
. Tendered aircraft no longer available (294/296/297 some or all) and
market has hardened considerably. This also raised "equivalence" or
"standardization" issues which have cost implications way beyond the
market firming on basic aircraft price. IAI implications unknown.
Should know more as soon as we get into the market and hone in on
specific aircraft units.
. understand all of this and advises that she will require that all
supporting accommodation and invoices are available to back up the
final cost.
. advised that clause 4A has significant implications on final cost to
ACS - J.A. understands but needs invoices to support final price paid
by Skywest.
. assured W.M. that she understood that 4A was unquantifiable but
could see no other way of containing ACS liability and still dealing
with the reality of SWAV's position.
. indicated his reliance on that position. Indicated ongoing trust in
J.A's integrity] Will send letter to Burns re g't. Will also accept
draft (Fox 4A new).
(W.M. 14/12)"
"Meeke: I think that either clause 4A is intended to be an open133. Mrs. Anderson, who kept no note of the conversation, gave a much shorter account of the conversation in her affidavit of 16 August 1993:
cheque, or it is very, very vague.
Anderson: By no means is it intended to be an open cheque. Provided
Skywest can substantiate its increased cost by way of supporting
information and invoices, then clause 4A is designed to recover those
costs of Skywest.
Meeke: You have to understand that there are some significant
implications because of the matters I have discussed, namely the three
intended aircraft no longer being available as a group, the fact that
basic aeroplane prices have hardened considerably, and the fact that
we have to address equivalence or standardisation of the three
aircraft which we are to purchase. This will impose additional costs
from IAI and if we can't deliver three standard aircraft, then I have
no idea what the additional IAI costs will be.
Anderson: These are the issues that clause 4A is designed to address.
You requested an escalation clause and ACS has offered you clause 4A.
Skywest will have to come up with supporting information to claim
under clause 4A.
.....
Anderson: Yes. I understand that the total cost that ACS will incur
with the existence of clause 4A is presently unquantifiable but I
believe that by virtue of having the supporting documentation
requirement in there, that ACS is able to contain its liability to
real costs and that Skywest is able to protect its commercial position
by way of recovering real costs.
Meeke: I am going to rely entirely on the position you have indicated
with respect to the three issues, the Corporate Guarantee, force
majeure and clause 4A and I will do that because of my trust in your
integrity and the explanation you have given me. .....
I will accept clause 4A in the final form sent by Julie Fox on the
basis of the explanation given by you."
"Meeke: Judith, as you are probably aware, the market for Westwinds134. As I have already said, this conversation was initiated by Mr. Meeke. There is no satisfactory explanation from him about the exclusion of the other Skywest representatives. If he felt that Mrs. Anderson was likely to feel less intimidated and more at ease to speak in the absence of the others, which seemed to be what he was suggesting in his evidence, then it sits oddly with his contention that what she said to him was to be regarded as part of the contract or as something upon which Skywest could rely in order to clarify or further its rights under the contract. Mr. Meeke's evidence that he believed that Mrs. Anderson had the authority to bind the Commonwealth is difficult to accept and in the end I reject it. She did not in fact have the authority and neither Mr. Burns or anybody else on behalf of the Commonwealth ever gave her ostensible authority. As senior officer of contract administration at ACS, Mrs. Anderson's opinion about how the Coastwatch contract would be administered was no doubt of great interest to Skywest but I do not accept that Mr. Meeke believed that what she said was binding.
has been firming for some time. It is unlikely that the three
Westwinds Skywest tendered are still available. I believe at least
one of the Westwinds has been sold. Skywest will probably have to pay
more for aircraft of a lower standard than those nominated. Is there
any way the Contract would cover the cost of bringing the Westwinds
Skywest eventually purchases up to the standard of the nominated
Westwinds?
Anderson: No, Bill. The Contract in its present form does not cover
that. It covers an increase in the purchase price of the Westwinds
but does not allow for modifications after purchase. The only way the
Contract, as it stands, could cover the situation you are talking
about, would be if a seller had anticipated your needs and had
modified the Westwinds to your requirements before you bought them.
Of course that's not very practical is it? A seller would not be
prepared to risk a lot of money upgrading a Westwind on the off chance
that you would buy it unless he had a firm commitment from you. Even
then, it would not be practical, would it, because of the time factor?
If I remember correctly, you are on a pretty tight schedule to get the
Westwinds to Israel to fit into the production line.
Meeke: No, it would not be practical. (Pause) It was worth a try."
135. The record of the conversation in Mr. Meeke's handwriting may not be entirely inaccurate, but it is, in my view, likely to be selective and slanted towards an interpretation of the conversation which tends to favour the Skywest case and particularly to favour what has become the Skywest case in estoppel. It is unlikely to have been made immediately after the conversation as Mr. Meeke claimed, because the meeting continued immediately after the conversation and Mr. Meeke's prime concern then was with trying to finalize the agreement on the matter of the guarantee. The note made by Mr. Meeke on this occasion is unusual in the context of other notes made by him of important conversations in the case, which were almost invariably typed out. Mr. Meeke's evidence about what he said to Mr. van Kann after the meeting, relating to the conversation with Mrs. Anderson, is contradictory and unconvincing and I reject it. It is curious that, if Mr. Meeke relied upon the conversation and made the note as he claimed, he made no mention of the conversation to Mr. Burns when he spoke to Mr. Burns on 20 December 1989 and thanked him for the confidence that ACS had placed in Skywest by the award of the contract. The conversation was never confirmed in writing addressed to ACS.
136. Furthermore, the conversation was not part of the material on which counsel advised Skywest as to its position in about July 1991. The claim as made initially in the statement of claim relied entirely on the contract. The claim in estoppel, to which the conversation of 14 December 1989 is relevant (or so I assume - see below), was not made until a second further amended statement of claim was filed on 30 July 1993. Mr. Meeke referred to the conversation in his affidavit sworn December 1992 (at which stage it appears to have been irrelevant to the case, which was then confined to a claim in contract).
137. It was submitted on behalf of Skywest that Skywest would never have entered into a contract to supply aircraft to be modified by it at its own expense when it could not anticipate the limits of the cost of modification, and that in such a situation it was the more likely that Skywest would be induced to enter into the Coastwatach contract by some sort of representation as asserted by Mr. Meeke. However, it is a considerable step to go on to say that what induced Skywest at the eleventh hour to enter into the contract was the assumption, induced by Mrs. Anderson, that the Commonwealth would meet the unquantifiable costs still to be incurred by Skywest and that Skywest could expect to recover its "real costs" so long as it had the supporting documentation.
138. I accept that although Mrs. Anderson did not give a complete account of the conversation, her evidence of what she said should be accepted. She proffered to Mr. Meeke a personal view of the effect of clause 4A, which was not binding on the Commonwealth, which was not intended to induce Skywest to act on any assumption and which did not have the effect of inducing Skywest so to act.
139. Further, whilst it may well have been that during the course of the conversation Mr. Meeke made some reference to "standardization" or "equivalence" (whether or not he used those precise terms), I am quite unconvinced that he did so in a way which led Mrs. Anderson to understand, or would have led any reasonable person in her position to understand, that Skywest would enter into the contract upon an assumption that the Commonwealth would be responsible for the increased costs of modification or for a variation in the fixed cost component which was to be derived from an increase in the cost of modification or to be derived from some notion of "equivalence" or "standardization".
140. In short, the evidence about the meeting on 14 December 1989 is irrelevant to the claim in contract and even if admissible in the claim in estoppel, it does not advance that claim. Furthermore, it has a substantial impact upon Mr. Meeke's credibility concerning other issues in the case.
The Burns Minute
141. Skywest relied heavily upon the minute dictated by Mr. Burns on 5
September 1991. It should be reproduced in full:
"Manager, Resources Management142. The extent to which the minute can assist Skywest's case is at the most doubtful. The expression of subjective belief about the meaning of a written contract is, for reasons given earlier, inadmissible to prove the meaning of the document. However, in the claim by Skywest based on estoppel such evidence may be admissible as on admission against interest on the part of the Commonwealth. It may also be admissible in response to the Commonwealth's claim for rectification insofar as it conflicts with the case pleaded and presented on behalf of the Commonwealth. Its weight is entirely another matter.
c.c. Acting Deputy Comptroller-General
National Manager, Coastwatch
ADDITIONAL COST OF SEA-SCANS
In the Contract between ACS and Skywest Pty Ltd concerning coastal
surveillance services there is provision for Skywest to advise of a
variation to the fixed cost component payable in relation to the
Sea-scan jets. This variation was designed as a once only adjustment
to take account of the difference between the actual cost of purchase
and modification of the aircraft and the tendered cost made some
eighteen or so months earlier. The variation must be derived from
Skywest's liability for
(a) The interest payable on the difference between the estimate
provided in the tender (US $1.8M) and the actual cost (which we
understand is closer to US $2.5M); and
(b) The depreciation on cost difference.
During the second round of discussions on contract implementation last
Tuesday Skywest advised informally and without any supporting data
that the approximate cost increase translated into daily standing
charges was now in the order of $750,000 to $1M per annum. That
represents the actual increase of $2.5M plus interest over the five
year life of the contract.
The contract provides that when claims for increased cost are made
there must be supporting documentation on all elements of the claim.
There is no suggestion that this documentation will be available until
early in the new year.
At the appropriate time early next year and assuming all appropriate
supporting material is provided we will need to seek either additional
funding in the order of $2.5M (with no change to the standing charge)
or increased funding for the annual standing charge of approximately
$1M a year.
This situation was foreshadowed with DOF a number of times last year
and most lately during discussions to include Coastwatch flying into
running costs. You will also recall that the cost of the Coastwatch
contract must be resolved between Ministers. I will keep you informed
of developments.
Sgd. P. Burns
Assistant National Manager
Coastwatch
5 September 1990"
143. Mr. Burns claimed - or admitted - that he dictated and signed the minute without giving proper attention to the detail and without refreshing his recollection of the relevant documents. He claimed - or admitted - to have committed the error of including the words "and modification" in the second sentence. He did not claim that had he turned his mind to the question at the time, he would have omitted the offending words. He did not appear to recognise (and was not asked about) another serious inconsistency between what he dictated in the minute and the case presented on behalf of Skywest, namely the reference to the estimate in the tender of US$1.8m being the cost of purchase and modification. As already indicated above, Skywest's budgeted cost was based on US$1.8m as the basic purchase price per aircraft together with estimated modification costs of US$680,000 and other costs, making a total cost to Skywest, exclusive of depreciation of US$5m per aircraft.
144. I assess the evidence of Mr. Burns on this issue with some care. I do not know when Mr. Burns came to recognise his mistake. I regard as insufficient the explanation that it was a mere oversight caused by a pre-occupation with convincing the Financial (Resource Management) Branch of Customs that financial provision needed to be made to cover a prospective claim under clause 4A. I accept that such purpose was probably the major one, but it does not fully explain overlooking, or indeed contradicting, the Commonwealth's presumed intention at the time of executing the Coastwatch contract that the purchase price in clause 4A referred to the price of unmodified Westwinds. I think that the error is indicative rather of a lack of clarity in the mind of Mr. Burns at the time the minute was dictated, a lack of clarity as to what the contract really meant in contrast with his state of mind at the time of execution. If the minute was merely an oversight, not representing Mr. Burns' true state of mind, its prejudice to the Commonwealth's case might be slight but it is strange that it expresses a view that is not inconsistent with to that expressed by Mrs. Anderson to Mr. Meeke on 14 December, namely that if Skywest managed to purchase aircraft which had already been modified then the cost of modification as it was reflected in the purchase price could be the subject of the formula used for a variation under clause 4A.
145. Mr. Sullivan QC for the Commonwealth submitted that the minute was an inconsequential internal working document. However, I think it was more than that. It is indicative of the very lack of clarity on Mr. Burns' part as to what the contract meant. In this respect it tends to support Skywest's case on estoppel and to conflict with the Commonwealth's case on rectification. Taken at its face value the minute makes it more likely that the conduct of the officers and of Mr. Burns in particular was such as to lead to an assumption by Skywest that the Commonwealth would pay for a variation which took modification costs into account. It was submitted on behalf of Skywest that the Burns' minute was decisive on this issue. However, if the minute tends to support Skywest's case it is not decisive of the issue and is simply one item of evidence to be taken into consideration.
146. The minute is rife with confusion. For instance, in referring to the purpose of the variation to the fixed cost component, the minute distinguishes between the "actual cost of purchase and modification" and the "tendered cost". The latter term must refer to the cost of purchase and modification encompassed in the tender. On no interpretation of the tender can the figure of US$1.8m be taken to include modification costs. The Commonwealth Tender Evaluating Committee had been told by Mr. Meeke at the meeting of 29 November 1989 that modification costs were expected to be about US$3.5m in all and must have understood that Skywest was envisaging the sum of the price paid for unmodified aircraft and costs of conversion to SeaScan would be in excess of US$3m per aircraft. It therefore did not make sense for Mr. Burns to record that the "actual cost" of purchase and modification was "close to US$2.5m".
147. Further, the minute records that "this was foreshadowed with DOF a number of times last year". Leaving aside the vagueness of the language, there is no evidence to confirm that ACS had previously ever raised with the Department of Finance (DOF) the possibility that the Commonwealth was liable for an increase in its liability under the Coastwatch contract which was to be derived from an increase of modification costs beyond those provided for or contemplated in the tender. Having regard to the comprehensiveness with which the evidence was gathered and presented on behalf of Skywest, I think that the absence of such evidence leads to an inference that it does not exist.
148. The minute emphasises that the informal advice of Skywest of the cost increase is unsupported by data or by documentation. The absence of documentation made it more likely, in my view, that Mr. Burns did not address his mind to the distinction between purchase price and modification costs. He stated in his own affidavit (para. 58) that at the meeting of 4 September 1990 he asked for a "ball park figure on the extra costs associated with the purchase of the Westwinds" (emphasis added). It was submitted for Skywest that he intended and was taken to include the cost of modification. In cross-examination Mr. Burns insisted that he intended to refer only to a "claim for increase by the scope of the mere purchase price for raw aircraft". I think it more likely that Mr. Burns did not address his mind at the time to the distinction between the purchase price for raw aircraft and the cost of modification.
149. It was submitted on behalf of Skywest that Mr. Burns knew that the discussion on 4 November was about costs some of which still had to be determined and which could not be confined to the purchase price already determined by purchase several months previously. Mr. Burns seemed to agree in cross-examination that the purchase price would have already been determined. However, his agreement was to a hypothesis which was not necessarily correct., because the vendor purchase agreements and TPE purchase agreements all contained provisions for adjustment of the purchase price and that adjustment might not yet have been made. Mr. Burns' assent to what was put, in my view, goes only to further indicate his lack of clarity.
150. I do not think that the absence of action on the part of Mr. Giles or Mrs. Anderson to correct the error in the Burns' Minute is sufficient to indicate that they knew and accepted that the Commonwealth was committed by the terms of the Coastwatch contract or by some assumption by the parties to a variation of the fixed price component referable to an increase in modification costs. Mr. Giles appears to have been in a similar state of lack of precise understanding as Mr. Burns. Mrs. Anderson on the other hand had a more precise belief as to the meaning of the terms of clause 4A and of the discussion of 4 September 1990 and conceded that she would not have expressed the minute in the terms used by Mr. Burns. However, in her position it was not her function to correct Mr. Burns or his minute and she was (understandably and properly) not confident about whether her interpretation of clause 4A was correct anyway.
151. I conclude that neither the Burns Minute nor the meeting the previous day advances the case for Skywest to the effect that the Commonwealth was aware that it had induced Skywest to act on the assumption that the Commonwealth would pay an increased service fee derived from an increase in the costs of modification from what was contained in or contemplated by the tender. The Burns Minute neither admits a precontract estoppel nor provides convincing evidence of the Commonwealth "feeding" an estoppel already established prior to contract.
Construction of Coastwatch contract
152. In my view, clause 4A is to be interpreted as meaning that any
adjustment to the fixed cost component was to be made having
regard to the
price paid by Skywest for aircraft purchased by it which, at the time of
purchase, were expected to need modification
to bring them into a condition
suitable for the performance of Task Two. The Coastwatch contract, however,
is silent as to the consequences
of Skywest purchasing aircraft already
modified to SeaScan, the purchase price of which has been substantially
increased by reason
of such modification.
153. The terms of the Coastwatch contract suggest, and the surrounding circumstances make it clear, that Task Two did not require Skywest to supply aircraft to the Commonwealth for the Commonwealth to use as it saw fit. The Coastwatch contract was essentially for the provision of services on the part of Skywest. For the purpose of providing those services Skywest was required to supply the appropriate aircraft equipment and personnel. The contract made provision as to the appropriateness of aircraft to be supplied.
154. Apart from the provision of clause 4A, there is nothing in the Coastwatch contract to indicate that Skywest was obliged to purchase aircraft on its own account at all. The circumstances justifying a variation might not have occurred. Further, a variation in the fixed cost component was not inevitable. Skywest was not obliged to notify the Commonwealth of a variation even if the circumstances justified a variation. The Coastwatch contract clearly contemplated the possibility of performance by both parties without recourse to clause 4A. It may well have been that, absent a wish to notify a variation in accordance with clause 4A, Skywest could have discharged its obligation by conducting the necessary surveillance by means of aircraft supplied by it pursuant to some licensing or leasing arrangement with a third party, whether or not a related corporation. The issue does not need to be decided. The point is that the Coastwatch contract in its terms was primarily concerned with surveillance services. The question of purchase of aircraft, as distinguished from the supply of aircraft, by Skywest, arises only if a question arises in relation to clause 4A itself.
155. Clause 4A is not concerned with the Commonwealth reimbursing Skywest for the difference between the actual purchase price per aircraft paid by Skywest and the hypothetical purchase price of US$1.8m per aircraft. What it does is to provide a process and formula for the variation of the fixed price component. The actual purchase price paid by Skywest is only one of the factors to which regard is to be had in applying the formula. The process proceeds in three stages - notification, documentation and verification - at the completion of which process the fixed price component shall be deemed to be varied from the commencement date. The formula for notification is furnished by para 4A.1 and is expressed to be derived from the liability of Skywest for an amount referable to certain interest charges and for certain depreciation costs. The amount referable to interest charges is to be calculated on the difference between a hypothetical figure and an actual figure, namely interest on a hypothetical principal sum of US$1.8m per aircraft and interest on the actual principal sum, being the monies actually borrowed to purchase the aircraft which were purchased in order to supply the services for the performance of Task Two. The rate of interest to be applied is calculated on the difference between, on the one hand, interest at commercial rates payable on the hypothetical purchase price per aircraft of US$1.8m and, on the other hand, the interest at commercial rates payable on the actual purchase price per aircraft paid by Skywest. At the date of contract it was not known if there was a difference but the terms of clause 4A allow for the difference if, as events subsequently occurred, a difference was established.
156. For Skywest to rely on sub-para. 4A.1(b) it was necessary that Skywest notify and support with documentation what it asserted was its liability for interest charges incurred on monies actually borrowed to purchase aircraft for the performance of Task Two. There is an implication that Skywest had to demonstrate that it had paid the purchase price for each of those aircraft. Further, for Skywest to be able to rely on sub-para. 4A.1(b) it was necessary for Skywest to notify and support with documentation what it asserted was its liability for depreciation costs in respect of so much of the purchase price as exceeded US$1.8m per aircraft, such costs to be calculated on a whole of life of 20 years. "The purchase price" in sub-para. 4A.1(b) must, in my view, mean the purchase price referred to in sub-para. 4A.1(a)(ii), that is, the purchase price actually paid by Skywest.
157. Sub-clause 4A.2 requires that the supporting documentation include certain details, including the effect on the fixed cost component of any variation in the purchase price. The meaning of the term "variation in the purchase price" is not immediately apparent. Clause 4A as a whole is concerned with an adjustment or to the fixed cost component of the service fee. The "variation in the purchase price" to which subclause 4A.2 is directed is but one factor in the adjustment or variation to the fixed price component. In order to bring about a variation there must be a substitution of one purchase price for another. Clause 4A does not provide any obvious criteria for selecting one purchase price rather than another which would give meaning to the term "variation in the purchase price". A substitution of the purchase price per aircraft actually paid by Skywest for the hypothetical price of US$1.8m per aircraft would appear to be the only "variation" that is in contemplation but this is far from clear. There is, in my view, sufficient ambiguity in the term "variation in the purchase price" as used in clause 4A.2 to recourse to extrinsic evidence as an aid to the interpretation of the whole of the clause.
158. There is a further question whether the term "aircraft" in the phrase "purchase price per aircraft" as used in subclause 4A.1 is or is not ambiguous. The key to its meaning is in its use in subparagraph 4A.2(a)(ii). The aircraft in question is the aircraft for the performance of Task Two for which Skywest has paid the purchase price and which complies with the specifications and requirements otherwise demanded by the contract. The simple term "aircraft" does not indicate whether it refers to aircraft modified or unmodified. The adjustment or variation to fixed cost component requires, by implication, that the aircraft be purchased and paid for by Skywest yet it is silent as to whether the aircraft purchased be in a modified or in an unmodified state. Nothing else in the contract is sufficient to prove the presumed intention of the parties in this respect once the issue is raised whether clause 4A refers to modified or unmodified aircraft. Ambiguity arises then as to the construction of the contract and extrinsic evidence as to the surrounding circumstances may be used to assist in its interpretation.
159. The extrinsic evidence consists in part of conversations between ACS officers and Mr. Meeke and Mr. van Kann and in part of documentary material. The tender documents are of particular importance. Communications between Skywest and IAI are irrelevant except insofar as they were known to the ACS officers. The background of the Menzies and Hudson Reports and the unhappy history of the Amann contract is relevant. There is no doubt that the contents of both reports were well at the fore of consideration by both Skywest and the Commonwealth during the negotiating period. The Menzies report was critical of the informal nature of the request for tender document used for the purposes of the Amann contract. The Menzies report recommended that there should be more rigorous testing of offers and in particular, that tenderers should be required to provide convincing evidence not only of their technical expertise and capacity to perform the services required by the contract but should also demonstrate their financial capacity to do so. For this reason, the Commonwealth indicated that it needed a breakdown of the price and cost structure of the tender.
160. At the Tender Evaluation Committee meeting on 24 November 1989, Mr.
Meeke said:
"Budget - we took a guestimate on what we thought the Commonwealth161. At the same time Skywest needed to know that any tender that it prepared would be within the budget provided for by the Commonwealth. In this respect Mr. van Kann and Mr. Davin for Skywest ascertained from Mr. Giles that the anticipated budget for Task Two was about A$10m.
could afford ... Publications - much has been spoken regarding Menzies
and Hudson. We read that. Yet again we went through that. We also
took a couple of (sic) getting the Commonwealth procurement manuals to
ensure that we (sic) fully au fait with the criteria by which the
Commonwealth would need to view our response."
162. In a covering letter dated 8 August 1989 which accompanied the tender
submitted two days later Mr. Meeke wrote:
"... We have assured ourselves that we have all of the necessary163. The tender itself contained Part 1 para. 4 headed "Aircraft Capital Costs", a most important provision, the terms of which have been set out above. It will be recalled that it identified the three suitable Westwinds by serial number as being available, and states that it assumes that these or similar aircraft within the serial number range 290-310 are available at the time of contract award for a price not exceeding US$1.8m each, and, if not available, Skywest would seek to negotiate a one off adjustment to the rates tendered.
resources to guarantee the successful, timely and on-budget
implementation of all tasks."
164. In the tender there were also the following provisions:
"Part A:-165. At D44 the tender stated:
In preparing our Response we have analysed and taken full account of
the RFT (request for tender) document and, in addition, have been
cognisant of
....................................................................
*Customs Budgetary Constraints and its expressed desire to optimise
both the cost and effectiveness of the solution
*Requirements of relevant government publications, including
- Menzies Report 1987
- Hudson Report 1988
- Commonwealth Purchasing Manual"
"Skywest will have a SeaScan at each of the three operational bases166. In attachment D to the tender, Skywest set out a number of responses to questions which had been asked in the RFT. Question 9.2 sought information in relation to the company's "program of preparation for services required under this contract" and the response was:
available for commencement of services no later than 12 months from
the date of acceptance of contract."
"The following program of preparation is based on the simultaneous167. A most important part of the tender is at clause 9.2(b). Against the question concerning "purchase or other acquisition of aircraft and certification of such aircraft" Skywest responded as follows:
introduction of three (3) SeaScan 12 months after the date of awarding
the contract."
"The three (3) required Westwind 1124s will be purchased in sufficient168. Against the question concerning to commencement of aircraft modification program, Skywest responded as follows:
time to enable the timely commencement of the conversion of the
aircraft to the SeaScan by IAI. In any event, it is anticipated that
the Westwinds will be purchased and delivered to Tel Aviv within three
(3) months of awarding the contract.
Certification of the SeaScan aircraft will be an ongoing project
commencing from the date of purchase of the Westwind aircraft and
finishing in sufficient time to introduce the aircraft in the 12 month
period.
Certification will be project managed by Skywest with the full
cooperation of IAI. Discussions held between Skywest and the CAA have
indicated a high level of cooperation with no envisaged problems of
certification of the SeaScan."
"The aircraft modification program will commence as soon as the169. Against the question concerning completion of aircraft modification program, Skywest responded as follows:
Westwind aircraft are delivered to the IAI factory, Tel Aviv. It is
envisaged that this will occur within three (3) months of date of
awarding of contract."
"Aircraft modification program will be completed in time to ensure170. Mr. Conti, QC submitted that the tender did not play any role of decisive contractual significance. It is true that the tender did not, in the classic language of offer and acceptance, constitute the offer or even the substantial part of an offer on Skywest's part which was accepted by the Commonwealth or accepted substantially subject to amendment. If the process of offer and acceptance needs to be identified, it was in the proffering by the Commonwealth of the two unexecuted "original" contracts brought by Mrs. Anderson to Perth which, after relatively minor amendment (the parties might not consider that the guarantee was a minor matter), were accepted by execution by Skywest. Alternatively it might be considered that Skywest offered the executed contracts to the Commonwealth for acceptance on its part by execution. Nothing turns on this. The tender is a powerful piece of extrinsic evidence and it was treated as such by both parties during their negotiations. Much, if not all, of the post tender discussions and negotiations prior to contract were in the context set by the tender and, whilst there was a bare possibility that the parties might have negotiated through to a position where there was mutual contemplation that Skywest would acquire the aircraft to be supplied in a state already converted to SeaScan, the tender set in place a presumed joint intention that the aircraft to be purchased would be purchased by Skywest and purchased in their unmodified state. Whilst that intention could, of course, be departed from by one or both of the parties, clear and convincing evidence would be required that there was such a departure. That evidence is lacking.
that sufficient time exists to undertake all necessary testing
familiarisation and ferry flights to enable the specified commencement
date to be achieved."
171. It was also submitted on behalf of Skywest that the Commonwealth remained open to negotiations right up until 14 December 1989 - witness the continuing negotiations on force majeure and the corporate guarantee. Reliance was placed on the instruction given by Mr. Burns to Mrs. Anderson prior to her departure for Perth with the original contracts in her brief case and communicated to Skywest with the faxed copy of the final contract: "any amendments can be made by pen". But the direction must be read in context. In my view, it meant no more than that, in the event of further discussion leading to agreement which required amendment to the documents which were up until that time regarded as final, someone could make the amendment, for each party, by pen. The directive says nothing about Mrs. Anderson's authority to bind the Commonwealth in further negotiation or whether she was subject to telephone directions. In fact, her subsequent conduct was such that it showed that she understood (correctly) that any alterations or amendments to the document were not to be made until after she had consulted and obtained approval from Canberra. I do not think that the Skywest representatives were under any different understanding.
172. The totality of documents and conversations prior to contract makes it clear that at all times Skywest knew and was concerned to make the Commonwealth aware that Skywest knew that the Commonwealth was operating to a budget and the Skywest's tender was designed to fit in with that budget. To this end Skywest sought to persuade the Commonwealth that the most suitable aircraft for the Coastwatch contract were the Westwind 1124 aircraft. Both parties knew these were not aircraft which were suitable in the condition in which they were produced by the manufacturer, that is as business jets. Some Westwinds were currently in use in Australia for freighter purposes and others in Germany as target towing aircraft. However the manufacturer was able to convert these models into what was called the SeaScan model suitable for maritime surveillance. Indeed the manufacturer had converted other Westwind 1124 aircraft to SeaScan for the Israeli Navy. By the time of the execution of the Coastwatch contract, arrangements, as uncertain as they may have been, were well in hand with IAI to convert to SeaScan such three Westwinds as Skywest might acquire for the purpose of the Coastwatch contract. The arrangement between Skywest and IAI had its origins in an expectation that Skywest would try to acquire for conversion to SeaScan the three aircraft that had been in use as target towing aircraft in Germany and which Skywest had nominated in its tender as available for purchase at US$1.8m each. This was clearly the price in their unmodified state and was known by Skywest and the Commonwealth to be so. However the availability to Skywest of the three nominated aircraft was not assured and any activity in the market place on the part of Skywest to make known its interest in purchasing any Westwind aircraft was likely to increase the market price. Furthermore, both Skywest and the Commonwealth envisaged a gap in time between tender and contract during which increases in the price of the nominated aircraft or other Westwind aircraft could occur. Hence the specific provision in the tender in Part 7 para 4 under the heading Capital Costs that the offer assumed that the nominated aircraft or similar aircraft falling within the particular serial number range would be available at the time of contract for a price not exceeding US$1.8m each and that if this assumption proved not to be correct, Skywest would seek to negotiate a one off adjustment to the rates set out in the tender.
173. The emphasis placed by Skywest on the availability of the nominated aircraft at the price of US$1.8m per aircraft and the need for provision in the contract for substituted aircraft with an adjustment to the rates offered if the nominated aircraft or the substituted aircraft were purchased by Skywest at a price greater than US$1.8m per aircraft, supports the proposition that the presumed intention of the parties was that the aircraft in question were to be purchased by Skywest, after contract, in an unmodified condition, then delivered to the IAI factory in Tel Aviv, within a fixed time from the awarding of the contract. In my view, it is unlikely in the extreme that reasonable persons in the positions of the parties would have approached the contract contemplating that within the time limited for the commencement of the service, Skywest might locate and purchase aircraft already modified to SeaScan or that aircraft already modified to SeaScan could be purchased for US$1.8m per aircraft or anything like that figure.
174. It was submitted that the words "for the performance for Task Two" in para 4A.1(a) mean capable of performing Task Two, that is to say SeaScan. However in the context of the document and the surrounding circumstances I do not think that this is so. The words mean only that the aircraft are to be used for the purposes of carrying out aerial coastal surveillance as required by Task Two and have nothing to do with the capacity or suitability for that surveillance at the time of purchase. In particular, the words do not refer to aircraft already modified to SeaScan at the time of purchase. In my view, Skywest cannot for the reasons already given succeed on its claim based upon the provisions of the contract to vary the fixed cost component by reference to the purchase price of aircraft already modified to SeaScan.
175. There is a further reason why I think that Skywest is not entitled to succeed on the claim in contract. It is convenient to discuss it below as it arises out of matters mentioned by Mr. van Kann in cross-examination but which are directly relevant to the plaintiff's claim in estoppel.
Estoppel: The law
176. Skywest's alternative case is that, even if the contract provided, like
the tender, for a formula for an increase in the fixed
cost component of the
service fee payable to Skywest if the purchase price of unmodified aircraft
exceeded US$1.8m per aircraft,
the conduct of the ACS officers was such as to
create an estoppel against the Commonwealth of the kind known as an estoppel
by convention
(a type of promissory estoppel) which disentitles the
Commonwealth from holding Skywest to the terms of the contractual formula and
entitles Skywest to claim equitable compensation against the Commonwealth.
177. It was submitted as part of the Commonwealth's written submissions that a pre-contractual estoppel cannot arise as a matter of law where a formal contract, inconsistent with the alleged estoppel, is later executed. However, in his oral submissions, Mr. Sullivan, QC retreated somewhat from this position. He conceded that the authorities conflict on the existence or otherwise of a general principle that an estoppel by convention cannot arise which is inconsistent with a subsequent concluded written contract expressed to contain the whole of the agreement between the parties. He submitted that it is established by the authorities that a court will not find an estoppel to have arisen to contradict the provisions of a written agreement unless there is clear and convincing evidence of the facts relied upon to support the estoppel and further, there must be established a clear case of unconscionability if the party responsible for the estoppel were permitted to enforce that party's contractual rights.
178. Ultimately, I do not think that Mr. Conti, QC for Skywest contended for a proposition of law that differed essentially from what I have just put as the Commonwealth's fall back position on the issue of estoppel. Mr. Conti's position was rather that equity will step in to assist the party wronged without the restraint that Mr. Sullivan's proposition would impose and that in particular equity will go further than simply preventing the wrong doer from enforcing the rights conferred at law by the contract and will compensate the party wronged if it is unconscionable for that party to remain uncompensated.
179. The cases, mostly Australian and mostly recent, were fully discussed in submissions. I do not intend to review the whole of the case law and academic literature. There is with respect a very useful survey of the High Court authorities by Mr. Kevin Lindgren, QC, as he then was, in a paper on Recent Developments in Estoppel delivered to the New South Wales Bar Association on 11 April 1994, updating his article Estoppel in Contract published in (1989) 12 University of New South Wales Law Journal 153. But none of the authorities binding on this Court deals with estoppel in the context of conduct leading to (and following) a formal written contract expressly providing that it constitutes the whole of the agreement between the parties.
180. Mr. Conti, QC relied upon the decision of the New South Wales Court of
Appeal in State Rail Authority of New South Wales v Heath
Outdoor Pty Ltd
(1986) 7 NSWLR 170 and of Rolfe J in Whittet v State Bank of New South Wales
(1991) 24 NSWLR 146 to support the submission
that pre-contractual conduct can
set up a promissory estoppel. As McHugh JA (dissenting) in State Rail
Authority put it (at 193):
"I do not think that the court should be deterred from extending the181. In State Rail there was an issue about whether the contract was wholly in writing and oral evidence was permitted relevant to that issue. It appears that McHugh JA treated the oral evidence as going also to the issue of estoppel. Glass JA assumed that it did but found the evidence insufficient to establish the estoppel alleged and Kirby P agreed.
doctrine of promissory estoppel to cases such as the present because
to do so is to outflank the doctrine of consideration or the
principles relating to collateral contracts. It is true that the
extension of promissory estoppel to precontract negotiations means
that equitable estoppel can be used to prevent the falsification of a
promise or expectation, a task which some think is outside the purview
of equitable estoppel: Finn, "Equitable Estoppel", Essays in Equity
(1985) at 94. It is also true that, unlike the case of a pre-existing
contractual relationship, the promisor cannot return to the status
quo. However, I think that the decisive consideration is that it is
unconscionable for a promisor to insist on his strict rights if he
induced the promisee to give them to him by an assurance that they
will be used only in a particular way or in particular circumstances
and the exercise of these rights is contrary to the assurance."
182. Rolfe J in Whittet (at 153) thought that the view of McHugh JA was correct and saw nothing in the decisions of the High Court or the Court of Appeal to "restrict the areas to which estoppel may reach once the matter on which the estoppel is founded are appropriately proved". Rolfe J considered that the relevant protection for maintaining the integrity of a written contract is the requirement of clear and convincing proof, proof that is to say, of the facts upon which the court proceeds to make a judgment that it is unconscionable to allow the promisor to rely upon the rights created by the contract.
183. Mr. Sullivan submitted that the law is as stated by McClelland J in
Johnson Mathey Ltd v A C Rochester Overseas Corporation
(1990) 23 NSWLR 190 at
195-196. That statement, which supports the case as put in the written
submissions, is as follows:
"In my opinion the parol evidence rule operates to exclude evidence of184. The decision of McClelland J was followed by Beaumont J in the Federal Court of Australia in Cafdawn Pty Ltd v Waltons Stores (Interstate) Limited, unreported, Federal Court of Australia, 28 March 1991. It follows, as the passage indicates, authoritative statements by Mason J and Kirby P.
an estoppel by convention alleged to arise from pre-contract
negotiations. In substance an estoppel by convention is in the nature
of an agreement. There is no less reason in principle that such an
agreement be treated as superseded by the subsequent written contract
than that any other agreement arrived at during pre-contract
negotiations be so treated. Furthermore it would be subversive of the
policy on which the parol evidence rule is founded, and would unduly
shake the security of written contracts, if proof were permitted of
such alleged estoppels. As Mason J said in Codelfa in relation to
the rule excluding proof of the actual, as opposed to the presumed,
intention of the parties (at 352):
".....an investigation of those matters would not only be time
consuming but it would also be unrewarding as it would tend to give
too much weight to these factors at the expense of the actual
language of the written contract."
It would be a serious threat to the stability of commercial
relationships and dealings if parties who, after lengthy and intricate
negotiations, deliberately recorded their agreement in permanent
written form, were subject to the risk of having that permanent
written record yield to the inherently less reliable evidence of oral
statements made during the course of negotiation, given possibly many
years after the event when witnesses may have become unavailable, and
when memories may have faded or become distorted by subsequent
occurrences and changing perceptions of self-interest.
I respectfully agree with the following remarks of Kirby P in State
Rail Authority of New South Wales v. Heath Outdoor Pty Ltd (1986)
7 NSWLR 170 at 177:
".....Too great a willingness by the courts to discern, in
pre-contract negotiations, a basis for estoppel will have the effect
of introducing a serious element of uncertainty into our law of
contract. It may also encourage expensive litigation in which the
terms of the writing are put to one side and the courts busily
engaged .....in a minute examination of the wilderness of
pre-contract conversations. This may be a reason, at least in the
case of written contracts which are accepted by the parties and are
not varied or elaborated, to hold the parties to the applicable
terms of such contracts and to limit carefully the development of
the law of estoppel, lest it seriously undermine the adherence to
bargains which are such an important feature of modern economic
life."
In my view, reasons of principle and policy combine to exclude
evidence of alleged estoppels by convention or any other agreements or
understandings arising in the course of pre-contract negotiations
which culminate in a written contract, except in proceedings for the
rectification of the written contract, when the established
requirement, as a condition of obtaining relief, of clear and
convincing proof of a common intention of the parties not reflected in
the written document, provides the necessary degree of security of the
written contract.
I would therefore exclude on general principles the evidence of
pre-contract negotiations for the purpose of proving an alleged
estoppel by convention.
But in the present case the provisions of art 18.9 provide an
additional reason for rejecting any such alleged estoppel. The effect
of such clauses as this (to which it is convenient to refer as 'entire
contract' clauses) has been considered in numerous cases.....
The effect of any particular clause will of course depend on its own
terms and context, but in general it may be said that except in the
case of fraud, and subject to any statutory provision, an 'entire
contract' clause will bind the parties in accordance with its terms,
properly construed. Such a clause itself gives rise to an estoppel by
convention which excludes any antecedent estoppel which might
otherwise have had effect."
185. In my view, the formulation of McClelland J is to be preferred. As I have stated, the High Court and New South Wales Court of Appeal authorities regarding estoppel discussed in Mr. Lindgren's article, do not provide a direct answer to the question posed in the present case. Whilst those cases indicate that an equitable estoppel can - in appropriate circumstances - arise from pre-contractual negotiations (see for example Waltons Stores (Interstate) Ltd v. Maher [1988] HCA 7; (1988) 164 CLR 387, Silovi Pty Ltd v. Barbaro (1988) 13 NSWLR 466, and Austotel Pty Ltd v. Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582), they do not address the situation where the parties, as here, have subsequently executed a formal legally binding contract expressed to constitute the whole of the contract between the parties but where one party contends that the other is estopped from relying on rights created by the written contract.
186. The advantage as I see it of the formulation of McClelland J is that it recognises the solemnity of the formal contract but still leaves room for departure from the terms of the formal contract where it would be plainly unjust to enforce those terms. It achieves that result by giving proper recognition to the well established concept of fraud whilst refusing to recognise that conduct of a lesser degree of moral turpitude should be accorded the stigma of unconscionability which will stand in the way of enforcement of legally binding contracts. Further, that formulation is entirely consistent with the principle that a collateral agreement, to be enforceable, cannot be inconsistent with the terms of the principal contract: Hoyts Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133. Lastly, it recognizes the force of statute law in cutting across judge-made principle.
187. The present case is not one in which Skywest seeks to have a term implied into the contract. One might speculate as to the result if the plaintiff in Codelfa had sought to rely on estoppel, but that was a case in which the claim was made that there was an implied term. As Mason J observed in Codelfa, a term will be implied where the presumed intention of the parties is such that, had they addressed their minds to the question, they would have made the provision in question an express term in their contract. No such claim is made in the present case. It is not contended for Skywest that, had the parties at the time of contract addressed their minds to the question whether the Commonwealth ought be liable for modification costs or increases in modification costs or for some figure derived from a formula applied to such costs, then a term to that effect would have been asserted into the contract. Nor does Skywest claim rectification on the basis that the actual intention of both parties was that the Commonwealth be so liable but they simply omitted to provide to that effect in their contract. In Codelfa, Mason J further observed at 370 that the more detailed and comprehensive the contract, the less ground there is for supposing that the parties have failed to address their minds to the question at issue. To the observation of Mason J, it might be added with respect, that when a contract in complex terms, entered into at arms length after lengthy negotiation between parties of experience, expressly provides that it constitutes the whole of the agreement between the parties, then there can be very little ground indeed for any supposition that the parties have simply omitted to insert the agreed term into the written contract. In Johnson and Mathey indeed, McClelland J stated at 196 that a provision in a contract that it constitute the whole of the agreement itself raises an estoppel which in the absence of fraud or some overriding statutory provision prevents both parties going behind the terms of the agreement. Further and, again as observed by Mason J in Codelfa at 370, in many cases what the parties have actually recorded as their agreement does represent a totality of their willingness to agree; each may be prepared to take a chance in relation to an eventuality which is in contemplation but about which consensus is not reached and for which no provision is made. In such cases, and, in my view, the present case is one of them, the scope of negotiations and discussions may include reference to some possible eventuality not provided for in the contract, for each party shrinks from seeking to reach express agreement with the other on how their contractual relationship should address such eventuality. Either one may be prepared to "take his chance", as Mason J put it, as to the effect of the contract, if any, should the eventuality occur.
188. In my view, although both Skywest and the Commonwealth were aware that the actual cost of modification to Skywest might exceed what Skywest had budgeted for in its tender, or at the time of contract, each party was prepared to take its chance on this eventuality, insofar as its rights under the terms of the contract might be affected if the eventuality came to pass.
189. I therefore hold at the threshold that Skywest is not entitled as a matter of law to succeed on the claim in estoppel and that the evidence that goes only to that issue is inadmissible.
190. I should acknowledge that in the judgment of Brennan J in Waltons Stores at 415 there is a passage which is explicit in stating that a plaintiff relying on promissory estoppel need not prove that the defendant actually induced the plaintiff to adopt an assumption and that a less positive role on the part of the defendant may nevertheless be sufficient for the plaintiff to succeed in a claim for promissory estoppel. I discuss this approach under a separate heading below.
191. As the state of the law is not settled by binding authority, and for the
assistance of the parties, I propose to make the necessary
factual findings
relating to the issue of estoppel based on the whole of the evidence in the
case and (if the factual findings justify
the further step) to arrive at a
view as to unconscionability. That is to say, I adopt the sort of approach
taken by Rolfe J in
Whittet and at the conclusion of the Lindgren paper where
the author states:
"It is suggested that it will be a good rule of practice to approachEstoppel: The facts
any issue of estoppel by inquiring first as to the precise assumption
which the plaintiff, according to the evidence, made, and then to
proceed to enquire into the defendant's responsibility for causing or
contributing to the making of that assumption, and finally to identify
the detriment suffered by the plaintiff in consequence. There are the
three essential elements to be proved, the fourth subject matter for
enquiry being as to the minimum remedy which will be required to
remedy the detriment."
193. Mr. Conti, QC, towards the end of his submissions, sought to emphasise that it was the Gulf War which in effect brought matters to a head. He suggested that from some time after the tender, through to the time of the contract and beyond, right until the end of 1990 and into early 1991, the Commonwealth through the ACS officers was concerned to foster an assumption by Skywest that the Commonwealth would pay for all the costs of modification to SeaScan or at least contribute through the formula provided by clause 4A to those costs of modification which went beyond those contemplated at the time of tender. This led to a pre-contractual estoppel, "fed" by the Commonwealth's conduct after the contract was entered into, such conduct continuing until the Commonwealth was confronted by a claim from Skywest that the Commonwealth should not leave Skywest alone to shoulder the increases in the costs of modification, safe-keeping and transport of the aircraft which had been occasioned by the intervening Gulf War. The claim is made in Mr. van Kann's letter to Mr. Giles of 31 January 1991. Thereupon, so it was submitted, the Commonwealth sought refuge not only in the force majeure clause in order to escape the consequences of the Gulf War costs (which clause Skywest, with reluctance, had to accept provided no solace to it) but then sought to renege on the very assumption that it had fostered and fed over all that time, relying instead on a literal construction of clause 4A which was constrained by the terms of the tender.
194. I think that it is true that the effect of the Gulf War on the relationship between the parties was greater than the case presented by either party sought to suggest, but not for the reasons put forward by Mr. Conti, QC. The evidence of Mr. van Kann is of particular importance here.
195. Although Mr. van Kann, like most of the other witnesses, appeared to be careful not to answer questions in a way which would tend to make him appear incompetent or dishonest in his dealings with the other party, he was, on the whole, an acceptable witness. He kept notes of many of the conversations. At the time he did so, however, he was not a disinterested party, and he was heavily under the influence and direction of Mr. Meeke. Whilst I do not think that he fabricated any of the conversations in his notes or in his oral evidence, it is likely that at least on some occasions the notes were expressed in such a way as to favour Skywest, that ambiguous conversations and tentative statements would be recorded as much more positive than they had been in fact and that matters glossed over or referred to by Skywest almost in passing, would be recorded as though they had been stated clearly and with emphasis. I have already referred to Mr. Meeke's habit of adding to the subject matter of a conversation towards its conclusion in order that a proposition contained within the addition might pass without dissent.
196. At the time of giving evidence, Mr. van Kann had left the employ of Skywest and although he was in fact working for a competitor, he showed no sign of animosity or antagonism to his former employer. I think by that time he had become a sufficiently independent witness for his evidence, particularly his oral evidence, to be given considerable weight.
197. Mr. van Kann said in cross-examination that after it became apparent that the aircraft to be acquired might not to be those nominated in the tender and that the cost of modification to SeaScan was thereby likely to be increased by the further cost of equalisation, Mr. Meeke adopted a strategy which he and Mr. van Kann both adhered to until some time early in 1991. The strategy was that in conversations with ACS officers, the Skywest representatives should "slide in" (Mr. van Kann's phrase) references to equalisation. According to Mr. van Kann, at some time between August and October 1989, Mr. Meeke adopted and Mr. van Kann followed a strategy to introduce the concept of equalisation into discussions with ACS officers and to do so in a way which would ensure that the ACS officers did not know what it meant. Mr. van Kann said that that strategy continued until the drastic effects of the Gulf War were felt. Mr. van Kann said that the strategy was employed successfully on three occasions prior to contract. He did not think that the ACS officers understood the references to equalisation and standardisation in the conversations in Tel Aviv in November 1989 and he did not think that Mrs. Anderson understood the similar references in the conversations he had with her on 30 November or 12 December 1989. It is instructive that Mr. van Kann said that he himself had no understanding of the terms "equivalence" and "standardisation" at the time of tender.
198. Mr. van Kann's evidence in cross-examination as to the purchase of the aircraft by the US based related company is also of significance. He said that the proposal began because of the convenience of using US registration and airworthiness certification for the purpose of ferrying the aircraft to Israel for modification to SeaScan and thereafter ferrying the converted aircraft to Australia. However, US legal requirements prevented registration and certification in any name but that of a US incorporated and resident company. Therefor, the vendor purchase agreements, which provided for transfer of ownership from the vendors to Skywest or its nominee, appealed to Skywest as a convenient and practical way, if not the only formal way, of effecting US registration whilst maintaining effective control of the aircraft as contemplated by the Coastwatch contract and without infringing its terms. However, as Mr. van Kann said in his evidence, Mr. Meeke spoke to him about making use of the US associate for the purpose of "capturing costs" associated with the equalisation of the aircraft purchased and attaching those costs to the purchase price of the Westwinds, a move which Mr. van Kann said was "connected to the concept of add-ons to the purchase price of Westwinds" as a result of not acquiring the aircraft nominated in the tender.
199. This part of the evidence of Mr. van Kann needs to be approached with caution because it was not given so much by way of recounting particular conversations and discussions but as a matter rather of subjective impression. However, it accords with the more precise evidence of Mr. van Kann about the events in 1990 when "the multitude and magnitude of overruns" on the costing of the Coastwatch contract became apparent. One such occasion is recorded in a memorandum dated 29 August 1990 from Mr. van Kann to Mr. Davin but made in response to an inquiry initiated by Mr. Meeke. Mr. Meeke asked Mr. van Kann to "go through the contract and find any provisions that might be in any way construed as escalation provisions". At that stage, said Mr. van Kann, "the penny hadn't dropped in my mind that we may be able to interpret 4A as SeaScan". His initial response made to the instruction of Mr. Meeke was to advise Mr. Davin that war insurance costs could not be brought within the cost of equivalence or equalisation, adding his view that "the use of this clause for such purposes was never envisaged by the Commonwealth, however .....".
200. Mr. van Kann's letter to ACS of 31 January 1991 clearly shows that at that date he was following Mr. Meeke's strategy to the extent that he was claiming a variation under clause 4A in relation to both increases in the purchase price over US$1.8m and increases in the costs of modification. Increases in the purchase price are claimed At AUD$35,359 together with other costs including "rectification of defects" and "standardisation" of AUD$1.448m, amounting in all to AUD$2.384m.
201. After the letter of 31 January 1991 and the pressures brought on by the Gulf Way, said Mr. van Kann, the strategy changed and Skywest approached its relationship with ACS on the basis that clause 4A could be read to read "SeaScan" not "Westwind", or as Mr. van Kann also put it, clause 4A entitled Skywest to "the totality of costs of getting a Westwind through to a certified SeaScan".
202. I accept the oral evidence of Mr. van Kann where it conflicts with that of Mr. Meeke and on matters where Mr. Burns, Mr. Giles and Mrs. Anderson appear to have no memory. I think that it is likely that Mr. van Kann has a reasonably accurate memory of what happened. Although I do not think that Mr. van Kann's notes of the meetings are completely accurate or totally reliable, they do not contradict the general effect of his evidence. As a result, I conclude that, once it was apparent to Skywest after tender that it might not be possible to acquire the three nominated aircraft for modification to SeaScan (the cost of modification being the responsibility of Skywest), Skywest was concerned to raise in the discussions with the ACS officers the hypothesis that the acquisition of other aircraft would expose Skywest to not only an increase in the price to be paid for their acquisition but also to an increase in the cost of modification. This strategy, as Mr. van Kann called it, was adopted notwithstanding that Skywest knew that the tender left the cost of modification as the responsibility of Skywest. The strategy, as far as Mr. Meeke was concerned, was not confined to the cost of so called equivalence. The recurrent theme of tension between Skywest and IAI in late 1989 is significant in that it displays Mr. Meeke's apprehension that, until a firm contract was entered into between Skywest and IAI, Skywest could not be sure of what its liability for the cost of
modification might be and there was always a risk that modification costs would outrun what Skywest had budgeted for in its tender. The risk was likely to increase the longer time passed for Skywest to identify and make firm arrangements for the acquisition of three particular existing aircraft, for until then Skywest could not hold IAI to a firm figure for the costs of modification. The modification contract was not entered into until 22 January 1990 after contract and after Skywest had located three aircraft for purchase and modification. The cost of modification, according to the modification contract, was US$3.535m, whereas the budgeted figure at the time of tender was US$.680 per aircraft or $2.40m in all. Some of the increase might have been attributable to the so called equalisation costs, but probably not much and certainly not all of it. The strategy perceived by Mr. van Kann was to "slide in" references to equalisation in conversations with ACS officers, and to do so in such a way as to ensure as far as possible that the ACS officers did not understand what it was about. But in relation to Mr. Meeke, I think that the strategy went further. From the time of the tender onwards, his apprehension that actual costs (both as to purchase price, modification and other costs) might exceed budgeted costs was such that he was concerned when the opportunity arose to include the conversations with ACS officers references to increased costs with the intention that in some way or other this could be used to Skywest's advantage on some future occasion. This assessment of Mr. Meeke's conduct I think explains his conversation with Mrs. Anderson on 14 December 1989 and his repeated endeavours thereafter, concentrating on equalisation. When the steep increases in holding charges, insurance costs and transporting the aircraft became apparent in the Gulf War context, with the encouragement of Mr. van Kann's new and more favourable interpretation of clause 4A, Mr. Meeke sought to rely on the past references in conversations to costs of equalisation to support a claim that all along ACS had shared a common assumption that the Commonwealth would be responsible for the costs of modification of the aircraft acquired, or for some part of such costs. For a while, Mr. Meeke tried to claim that the costs included those factors attributable to the Gulf War, but that claim was not strongly pressed either at the stage when Mr. Meeke had to accept the force majeure clause, or in the present proceedings.
203. Far from the Commonwealth fostering any relevant assumption on the part of Skywest which would have implications for the purpose of establishing an estoppel in Skywest's favour, I think that all the fostering was on the part of Skywest, chiefly Mr. Meeke, but aided by Mr. van Kann. The state of mind of the Commonwealth can be ascertained only by reference to the states of minds of those of its officers who bear some responsibility. They were, in descending order of responsibility, Mr. Burns, Mr. Giles, Mrs. Anderson and Mrs. Fox. I do not think any of them had a firm idea of what clause 4A meant or was intended to mean even from the Commonwealth point of view and their conduct after the contract was executed has to be understood in that light. Their position is perhaps understandable since it has taken a long and complex piece of litigation to establish answers to these questions and this judgment may not be the last of it. But in the pre-contractual negotiations none of them assumed that the Commonwealth intended to confer a right in Skywest to claim anything referrable to increased costs of modification and none of them made any representation which caused Skywest to act upon such an assumption. The allocation of responsibility amongst the Commonwealth officers was not clearly defined. Mr. Burns, with overall responsibility for the Coastwatch sub-program (but who appears to have been also acting national manager for some time prior to the appointment of Mr. Conlon in December
1989), appears to have left part of the negotiating to Mr. Giles and Mrs. Anderson. Yet neither of the latter appear to have realised the extent of the responsibility left to them. I think it likely that Mr. Burns and Mr. Giles were aware in a vague sort of way prior to contract of Mr. Meeke's concern that not only would the purchase price of each of the unmodified aircraft be likely to exceed US$1.8m but also that the cost of modification would be likely to exceed what Skywest had budgeted for in its tender. But they regarded it as Skywest's concern and not theirs at least from the time that they satisfied themselves in late November 1989 that there were satisfactory and feasible arrangements between Skywest and IAI. In the pre-contractual sequence of events, however, there was nothing in the conduct of the ACS officers to induce a belief in Skywest that they were committing the Commonwealth to pay for or contribute to the cost of converting unmodified Westwinds to the SeaScan model, or any increase in such costs. It was the fact that the ACS officers had little or no appreciation of the concept of equalisation. Skywest knew it and was concerned to keep it that way. There could be no belief or assumption by Skywest that the Commonwealth understood the concept: the very contrary was the case. There could be no belief or assumption by Skywest that the Commonwealth would pay for, or contribute to, modification costs.
204. Mrs. Anderson's statement to Mr. Meeke on 14 December 1989 that Skywest was entitled, under clause 4A, to a claim based on the purchase price of modified Westwinds so long as the seller anticipated Skywest's purposes and carried out the modification prior to purchase is not one of the representations relied upon. However, and even if it were, it would not, in my view, be sufficient to establish an estoppel because it was not until the "penny dropped" in Mr. van Kann's appreciation of the meaning of clause 4A in January 1991 that Skywest adopted the approach that clause 4A entitled Skywest to claim what it had paid its US associate to acquire the aircraft after costs of modification, holding, ferrying and other costs had been added to what Skywest was liable to pay to the vendors under the vendor's purchase agreements.
205. Mr. van Kann's evidence is also of significance in relation to Mr. Meeke's contention that Mr. Granot for IAI indicated in about July 1989 that the nominated aircraft would be "ideal" for modification to SeaScan. Mr. van Kann said that this sort of language was not used by IAI during negotiations and that IAI would not respond to an inquiry about the suitability of an aircraft by saying it was "good": at the most IAI would concede that it was "not bad".
206. Furthermore, according to Mr. van Kann, no one at IAI ever stipulated that the modification was to be carried out on the nominated aircraft, although IAI did express a preference for aircraft bearing serial numbers from 250 upwards. A fax from IAI of 28 December 1989 tends to support Mr. van Kann's evidence on this aspect, with its recommendation to "try to avoid" aircraft with serial numbers below 250. This fax indeed mentions "the four German target-tow" aircraft as if they are still available but far from stipulating that they are the aircraft proposed for modification expresses doubt whether they have "the structural provisions", adding "we think they can be accepted to the program ..... their (sic) being 3 identical a/c will help both IAI and SWA in the mod. program".
207. An earlier fax dated 7 August 1987 from Mr. Johnson of Skywest to Mr Granot of IAI purports to confirm a conversation in which Mr. Meeke indicated that Skywest needed to include in the tender "serial numbers etc. of three aircraft currently available for sale" and stresses that "the quoting of those details in no way commits IAI to these aircraft". This fax is in response to what Skywest saw as lack of commitment to anything specific on the part of IAI in an earlier communication for IAI of 6 August 1989. It contradicts the assertion by Mr. Meeke that the arrangements with IAI were "predicated" on the availability of the nominated aircraft.
208. Mr. Meeke's use of the word "predicate" is itself somewhat remarkable. As far as I understand it, the only use of the word in the documentation is in his letter of 9 August 1989 to Mr. Burns stating "our tender prices must be predicated on our best understanding of present market prices and aircraft availability" and seeking "ongoing advice regarding the availability and prices of suitable aircraft". The letter states that having obtained from sources other than IAI details of no less than six Westwinds available on the world market, Skywest has selected three to form the basis of its tender at an average purchase price of US$1.8m each. This letter is inconsistent with the contention that previous ROMs were based or "predicated' specifically on the nominated aircraft but is entirely consistent with the ensuing transactions between IAI and Skywest up to and including the executed modification agreement.
209. In the light of the above, I reject Mr. Meeke's evidence that there was a conversation between himself and Mr. Granot in July 1989 in which Mr. Granot said, "We will give you a quote based on the target touring aircraft", and which followed a discussion on "the assumption of identical aircraft". I do not accept that Mr. Meeke responded to Mr. Granot by saying, "Where on earth am I ever going to find three identical aircraft?" I also reject his evidence that he thought that the requirement in the SOW of 25 July 1989 that Skywest deliver to IAI three Westwinds "suitable for modification into maritime patrol configuration" meant that three identical aircraft had to be delivered. His reason that "every modification contract that I've ever negotiated has presupposed identical aircraft, always" is quite unconvincing.
210. The plaintiff's claim in estoppel (assuming it is good in law) must fail on the facts for the reasons already given, namely that the Commonwealth did not induce in Skywest any assumption upon which Skywest relied to its detriment. There is nothing unconscionable in holding the parties to the terms of their contract.
Estoppel: The approach of Brennan J
211. In Waltons Stores, Brennan J said at 415:
"..... a defendant who has not actually induced a plaintiff to adopt212. As I have already said, I am of the respectful opinion that statements such as this do not apply to affect or contradict rights governed by a contract wholly in writing. If, however, that view be wrong, it appears that the approach of Brennan J affords to Skywest a stronger position than the approach which requires proof of an intentional and active inducement on the part of the defendant. In other words, consideration must be given to whether Skywest is entitled to succeed on its estoppel claim by proof that the strategy of Mr. Meeke was successful in that, by failing to respond to or even understand the introduction of the equivalence concept into the negotiations and discussions, the ACS officers allowed Skywest to assume that, the Commonwealth, ignoring its rights under clause 4A, would pay for or at least contribute to the increased costs of modification, that assumption having been adopted as a result of the ACS officers failing to deny to Skywest the correctness of that assumption upon which assumption Skywest proceeded to incur the increased costs of modification. The answer is, I think, partly in the need for the facts founding the estoppel to be clearly proved. Here I think that the exact assumption adopted by Skywest is a long way from clearly proved. As I have shown, Mr. Meeke's evidence on such matters is not wholly satisfactory, contains contradictions within itself and conflicts with that of Mr. van Kann in important respects. Furthermore, the term assumption may not be wholly appropriate: the Meeke strategy was to put the Commonwealth in a position where the ACS officers could not deny the conversations in which the so-called assumption about equivalence was expressed. In my view, the doctrine of promissory estoppel does not apply in such a situation because the defendant has not promised or represented anything: it is the plaintiff who is deliberately responsible for giving a superficial appearance to the defendant's conduct to make it appear that the defendant's conduct has allowed or caused the plaintiff to adopt the assumption, when the reality is otherwise. In my view, the Commonwealth is not liable for failure to deny to Skywest the correctness of any assumption or expectation on which Skywest chose to conduct its affairs.
an assumption or expectation will nevertheless be held to have done so
if the assumption or expectation can be fulfilled only by a transfer
of the defendant's property, a diminution of his rights or an increase
in his obligations and he, knowing that the plaintiff's reliance on
the assumption or expectation may cause detriment to the plaintiff if
it is not fulfilled, fails to deny to the plaintiff the correctness of
the assumption or expectation on which the plaintiff is conducting his
affairs."
"Purchase price paid by the contractor"
213. There is another reason why I consider that the plaintiff cannot succeed
on it claim under the contract. It is raised in para.
10D of the
Commonwealth's second further amended defence.
214. This raises a consideration of the phrase in sub-para. 4A(a)(i) "Purchase price paid by the contractor" as it is applied in the surrounding circumstances. These words, no doubt, need to be read subject to the preceding words in the paragraph namely, "for the performance of Task Two". As I have already explained, these preceding words do not mean "already modified to SeaScan" as the plaintiff's primary submission would have it and as Mr. van Kann thought they might when Mr. Meeke asked him to reassess the effect of clause 4A.
215. The words "paid by the contractor", according to the plaintiff's case mean no more or no less than their prima facie meaning and the identity of the vendor or the person to whom the purchase price was paid does not matter. In other words, it is submitted for Skywest that these words apply to the price paid by Skywest to TPE under the TPE purchase agreement and not to the price fixed for each aircraft by the vendor purchase agreements and for which Skywest was liable to the respective vendors. However, I do not think that this is so. It is true that the arrangements in respect of each aircraft whereby Skywest entered into an agreement for purchase whereby the vendor was obliged to sell at the price fixed by the agreement either to Skywest or to a nominee of Skywest should Skywest so direct were entered into for legitimate commercial and practical reasons. They were not entered into in order to enable Skywest to avoid the limiting effect of clause 4A on its true construction and no submission was made on behalf of the Commonwealth that such was the intention. But the implementation of the vendor purchase agreements made at arms length between Skywest and the vendors has to be seen, in my view, in the light of the subsequent TPE purchase agreement between Skywest and its associated nominee, whereby TPE agreed to sell on to Skywest the modified aircraft. The effect of the TPE purchase agreement was that the three vendors were paid the purchase prices fixed by the three vendor purchase agreements in discharge of the liability of Skywest under the vendor purchase agreements. The interest of TPE in the aircraft was no more than that of a vehicle or conduit.
216. There is no evidence that TPE did anything positive in relation to supervising or approving the modification work done by IAI. That was all attended to by Skywest, as far as the evidence shows. According to Mr. van Kann, although the US associate made the payments to IAI, Skywest scrutinised every bill that was sent by IAI for the modification because, as Mr. van Kann said, "we were the technical experts in terms of the administration of the contract and it was our approval that allowed California to make payments to Israel". Skywest exercised control over the aircraft as if it was the owner and TPE its agent subject to its direction. TPE may have taken steps towards certification of the aircraft and registration in its name in the United States but that was imply a step in completing the sale of the aircraft back to Skywest. The inference is to be drawn that the purchase price paid to each vendor was in a real sense paid on behalf of Skywest if not by Skywest itself. Skywest could not avoid the consequences of a payment by it by arranging for a payment on its behalf. I conclude that the purchase price of each aircraft sold by the three vendors to TPE was paid by Skywest. It is the purchase price fixed by the particular vendor purchase agreement which constitutes the "purchase price per aircraft" referred to in para. 4A(a)(ii) and sub-clause 4A(b) of the contract.
217. As I have said, the evidence is incomplete as to what payments were made or at what time or by whom. Furthermore, the evidence does not establish that at the time of the TPE purchase agreement TPE had any interest in any of the three aircraft, with the possible exception of aircraft serial number 259 which was the subject of an "amendment" to the vendor purchase agreement of 6 April 1990. The evidence relating to the amendment is confined to a document dated 20 April 1990 executed by Skywest only. The document purports to constitute an assignment of Skywest's rights in the vendor purchase agreement to TPE. The aircraft is said to be "presently owned by Central Financial Services Inc." and to be conveyed from the vendor to Skywest only at or immediately after Central Financial Services Inc's conveyance to the vendor.
218. It is neither possible nor necessary to arrive at a firm conclusion as to the legal effect of all this. What is clear is that Skywest gained control of all aircraft as a result of the vendor purchase agreements and retained that control throughout. Skywest incurred liability for the payment of the purchase price for each aircraft and ultimately discharged that liability, whether by direct payment to the vendor or through TPE or through some other intermediary. In this highly artificial setting, the interest of TPE in the aircraft was no more than that of a vehicle or conduit.
Damages and other relief
219. In most civil claims, particularly those where damages are claimed for
breach of some legal right as contrasted with a claim
for equitable relief,
the need to look at the way in which damages are sought to be assessed does
not arise until the question of
liability has been resolved in the claimant's
favour. In some cases, however, the relief sought, or the way in which
damages or
compensation are sought to be assessed, may shed some light on the
nature of the claim made which may help determine whether the
claimant's
rights have been infringed or whether the conduct of the other party is such
as to call for the grant of any relief or
the award of any damages or
compensation at all.
220. Skywest's claim in damages for the Commonwealth's failure to vary the fixed cost component of Task Two after proper notification and documentation by Skywest is a claim for breach of contract as a result of which, according to para. 33 of the statement of claim, the plaintiff suffered loss and damage.
221. The claim for equitable compensation is made somewhat differently. In
para. 41 it is alleged that the Commonwealth has refused
to fulfil or withheld
from fulfilling the terms of the assumptions and expectations relied upon in
the following respects:
"(a) By non-payment or recoupment to the plaintiff of at least the222. At the end of the statement of claim relief is sought in the following terms:
following expenditures:
(i) The difference between each of the initial purchase prices paid to
the previous owners of the Westwind aircraft 253, 272 and 259 and the
sum of US$1.8m;
(ii) The cost of equalisation and standardisation of the said
aircraft;
(iii) Not less than the difference between the ultimate costs of
modification of the said aircraft by IAI and the estimates of such
costs provided by IAI to the plaintiff for the purposes of the
plaintiff's tender of 10 August 1989;
(iv) Other costs reasonably connected or incidental to (a), (b) and
(c) above including those occasioned by the hostilities in the Middle
East; and
(v) Other costs incurred by reason of the extension of the period of
"lead time" of 16 months.
(b) By non-acceptance of any monies invoiced by Ansett Leasing or any
other company in the Ansett USA group.
(c) By not giving favourable consideration to the treatment of
additional costs incurred by the defendant in relation to the
modification and transportation of the said aircraft occasioned by the
hostilities in the Middle Ease, being costs not sought upon the basis
of the force majeure clause of the surveillance contract.
42. By reason of the matters pleaded in paragraphs 34 to 41 hereof,
the conduct of the defendant in withholding from payment of at least
the expenditures described in subparagraph (a) of paragraph 41 hereof
is unconscionable and the plaintiff claims equitable damages on that
account by way of alternative to the monies quantified in the
plaintiff's claim for relief numbered (i) and (ii)."
"1. Damages in the sum of $4,423,830.66 up to and including 31223. In the written submissions lodged on behalf of Skywest, it is stated that part of the claim for equitable compensation (namely the claim for the costs described in sub-para. 41(a) as item (ii) the costs of equalisation and standardisation, (iii) the increases in modification costs, and (iv) incidental costs including Gulf War costs) is equivalent to the damages claimed for breach of contract. I am unable to understand how this is so. The claim for breach of contract must, in my view, be confined to failure to pay the amount by which the fixed cost component of Task Two stood to be varied according to the provisions of clause 4A. If the cost of equalisation, modification or standardisation was to be included in the purchase price of the aircraft under para 4A(a)(ii) (a matter which is strongly in issue) then that would have an effect on the variation but in no way can it be that within the terms of the contract Skywest was entitled to the whole of the costs of equalisation and standardisation or for the costs attributable to the Gulf War for these costs to be recoverable it seems to me that the plaintiff must be restricted to the claim in estoppel. As far as the Gulf War costs are concerned, Mr. Conti, QC practically conceded that that part of the claim was not sustainable and I reject it.
December 1992.
2. A declaration that the plaintiff is entitled to a variation to the
fixed cost component payable in relation to Task Two from 1 January
1993 to the date on which the plaintiff ceases to provide to the
defendant the aerial surveillance and other services as defined in the
surveillance contract, being a variation to be calculated in
accordance with the summary referred to in paragraph 31(a) of this
statement of claim and in particular page 12 thereof.
3. Interests.
4. Costs.
5. Further or other orders."
224. Another matter relating to damages which reflects on Skywest's claim in estoppel is the concession made against what was called "double payment". To the extent that I understand the submission, it is that Skywest acknowledges that it is not entitled to claim for the actual modification costs or equalisation costs or for the actual increase in modification or equalisation costs in addition to the amount by which the service fees increased by a variation to the fixed cost component by notification under clause 4A.
225. At the same time it was argued on behalf of Skywest that it was in the mutual interests of both parties that Skywest try to contain the capital costs associated with the acquisition of the aircraft, since Skywest was not on-selling the aircraft to the Commonwealth but merely obtaining reimbursement from the Commonwealth of interest charges and an amount equal to depreciation limited to the term of the contract. Mr. Sullivan replied to this by saying that on the plaintiff's very argument the effect of the formula of clause 4A was that Skywest would be paid the whole of the increase in the purchase price of the aircraft, because it had depreciated the aircraft entirely over the term of the contract, so that at the end of the term the book value would be zero. Mr. Meeke may have acknowledged this in cross-examination when he agreed that if the construction of clause 4A was as he said it was, then the Commonwealth would be effectively paying for the whole of the aircraft. I am not sure whether he rather meant the whole of the increase in the price of the aircraft. However, exhibit C shows that the plaintiff's allowance for depreciation was for a period of 11 years. Clause 4A allows for depreciation on a whole of life basis of 20 years. The term of the contract was five years. I am unable to see how it can be said that Skywest's interpretation of the depreciation provisions, or any other interpretation, makes the Commonwealth liable for the whole of the price of the aircraft (or even for the whole of the increase in the price of the aircraft). I therefore reject what I understand is the submission for the Commonwealth that Skywest had no interest in containing or limiting
capital costs. On the other hand, if the increase in the Commonwealth's liability was to be fixed only by a variation to the fixed cost component of Task Two, based on an increase in the purchase price of unmodified aircraft over and above US$1.8m, then the interest of Skywest in keeping the cost of modification and other costs apart from the purchase price to a minimum is apparent enough. There is accordingly considerable strength in the written submission made on behalf of the Commonwealth that the conduct of Skywest in negotiating so strongly with IAI is more truly seen as reflecting its recognition that Skywest and Skywest alone was the party at risk in respect of the costs of modification or of any increase in such costs. There is also the associated point, relevant to the claim in estoppel, that Skywest recognised that if it were made plain to the Commonwealth that Skywest was proceeding to enter into the contract on the assumption that the Commonwealth was shouldering the cost of modification, or any increase in the cost of modification, or the cost of equalisation, then the contract might not be consummated. The warnings of the Menzies Report were clear in the minds of the representatives of both parties. It was highly unlikely that the ACS officers would allow the Commonwealth to be drawn into a contract which placed no limit on the costs to it of the aircraft to be supplied for the purpose of Task Two. It was more likely that the ACS officers were prepared to allow the Commonwealth to be exposed to the limited increase allowed for in the variation to fixed cost component as provided for in clause 4A. From a commercial point of view, of course, Skywest did not want to be drawn into an agreement which was open ended as far as costs to it was concerned. The difference in the respective positions of the Commonwealth and Skywest, however, was that the Commonwealth was not in the market, whereas Skywest was. Skywest had the capacity recognized by both parties and subsequently exercised to seek out suitable aircraft and to arrange for the modification and, as it repeatedly said at least at the time of tender, it was highly confident of its ability to operate within budget.
226. The Commonwealth shared with Skywest an interest in minimising the purchase price of the unmodified aircraft, but as far as modification costs were concerned, it was Skywest who controlled the operation and who was negotiating with IAI and who was to pay IAI, all of which was true at the time of tender and continued through until contract and beyond. All that is more consistent with a common understanding that the whole of the responsibility for modification costs, including equalisation, standardisation and any increase therein was to remain with Skywest and none of it was to pass to the Commonwealth.
Outcome
227. The Commonwealth admits in its defence filed that Skywest notified to it
by letter dated 8 July 1991 an amount which Skywest
alleged was a variation to
the fixed cost component payable in relation to Task Two. The Commonwealth
further admits that on 24 June
1992, Skywest served on the Commonwealth a
document entitled "Accounting evidence". The Commonwealth says that as a
result it has
offered to vary the fixed cost component of Task Two in
accordance with clause 4A of the Coastwatch contract and that it did so by
letter addressed to Skywest's solicitors dated 14 November 1991. The offer
was rejected. As I understand it, Skywest would accept
that, on the
construction I have placed upon clause 4A of the contract, the offer was
sufficient to discharge the Commonwealth's
liability to vary the fixed cost
component. Nevertheless, the payment that would have followed as a result of
the variation has
not been made.
228. In the circumstances, it would appear that the plaintiff is entitled in principle to judgment in respect of the claim for breach of contract in the terms offered by the Commonwealth on 14 November 1991 or similar terms. It also appears appropriate to dismiss the plaintiff's claim in estoppel and to dismiss the defendant's counter-claim for rectification. However, I will hear counsel on the form of orders and on costs. Any submissions will have to be in the light of my findings.
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