New South Wales District Court CITATION: EDE Excavations Pty Ltd v Lake Macquarie City Council [2008] NSWDC 281 HEARING DATE(S): 5-6 November 2008 JUDGMENT DATE: 14 November 2008 JURISDICTION: Civil JUDGMENT OF: Sidis DCJ DECISION: On liability only : Found against Defendant. CATCHWORDS: CONTRACT - wrongful termination - repudiation - failure to follow process provided in contract - obligations of good faith and fair dealing CASES CITED: Burger King Corporation v Hungry Jacks Pty Limited (2001) 69 NSWLR 558 PARTIES: EDE Excavations Pty Ltd - (Plaintiff) Lake Macquarie City Council - (Defendant) FILE NUMBER(S): Newcastle 236/07 COUNSEL: A M Slevin - (Plaintiff) P R Cummings - (Defendant) SOLICITORS: Slater & Gordon - (Plaintiff) Grant W Long - (Defendant) JUDGMENT 1 EDE Excavations Pty Limited on 20 May 2006 submitted a tender to Lake Macquarie City Council to supply services by way of what was described as a standing offer. The services related to the provision and operation of a bobcat at rates specified in the tender. The Council accepted the tender, with the result that a contract came into effect on the terms that were attached to the tender document. The contract was for a term of 12 months from July 2006 and operated on the basis that the plaintiff was notified the day before its services were required. Its bobcat was then taken to a nominated site and operated for a required period. 2 Claims for the work undertaken were submitted in the form of a documented headed Contractor Timesheet. This document was referred to in evidence as a timesheet. 3 The sole principal of the plaintiff was Mr Clynch. It was Mr Clynch's practice to submit timesheets weekly. The proceedings involved two such timesheets, one for the week ending 25 November 2006 and the other for the week ending 2 December 2006. The timesheets contained the following under the heading Authority: I/we certify that this supply has been rendered or delivered according to order or tender and has been supplied in good order and condition. 4 The authority on both timesheets was signed by Mr Clynch for the plaintiff and D Simmons, Site Supervisor, for the Council. 5 On 5 December 2006 officers of the Council interviewed Mr Clynch concerning the plaintiff's claims as made in those timesheets. The contract was terminated on that day. Mr Clynch was informed that the plaintiff would never again secure work from the Council. 6 The statement of claim alleged against the Council breach of contract amounting to repudiation and wrongful termination, leading to loss and damage. The Council's defence raised the issue of its entitlement to terminate the contract on the basis that falsified timesheets were submitted. It claimed that the plaintiff waived its entitlements, if any, under the contract because it committed the fraud constituted by the submission of the false timesheets. It claimed that the Council was entitled to terminate the contract for the reasons stated in its letter to the plaintiff of 19 December 2006 and that the plaintiff had been given an opportunity to explain its conduct. 7 The proceedings were heard on 3 and 4 November 2008 on the issue of liability only. The evidence proceeded by way of affidavit and the deponents to the affidavits were cross-examined. 8 Affidavits filed by the Council indicated that it received information late in November 2006 that raised concerns about the nature of the relationship between its site supervisor Mr Simmons and Mr Clynch, and the question of whether the timesheets identified were falsified. The informant was not identified and was not called to give evidence in these proceedings. 9 Council officers Neilson, the Human Resources Officer, Alan Reid, Civil Lake Projects Section Manager, Darryl McKinnon, Internal Auditor, and Amanda Colby, then Manager Civil Lake, now Director Operations, gave evidence to the following effect. 10 On 5 December 2006 they interviewed three employees, one of whom was Darren Simmons. They then interviewed Mr Clynch for the plaintiff. At the conclusion of the interviews Mr McKinnon and Ms Colby met with the General Manager of the Council, Mr Brian Bell, who directed that the contract with the plaintiff be terminated forthwith because timesheets were submitted that overstated the hours worked. The allegations of over statement related to timesheets for 25 November 2006 and 2 December 2006 only. 11 In a letter dated 19 December 2006 the Council confirmed that the contract had been terminated effective from 6 December 2006. Notwithstanding that the Council alleged overstatement only in respect of two of the days worked, the Council in its letter of 19 December 2005 offered a reconciliation of the plaintiff's outstanding claims in respect of the work done in the weeks ended 25 November and 3 December 2006 as follows: two hours was paid for 25 November 2006 in lieu of the eight hours claimed; no payment was made for work claimed to have been done on 2 December 2006, for the period 27 November to 1 December 2006 inclusive, the claim was reduced to 8.5 hours and for the work performed on 4 and 5 December 2006, the claim was reduced to 7.5 hours per day. 12 In his evidence to the Court, Mr Clynch offered an explanation for the timesheets which allegedly overstated the plaintiff's claims. He said that on 25 November 2006 he did not arrive at 6.30am and leave at 3pm as claimed in the timesheet. To that extent, therefore, he conceded that the timesheet was false. He said he arrived at about 8 or 8.30 and left at 4pm. He said he used attachments to his bobcat that would have entitled the plaintiff to claim an increased hourly rate for some of the time involved. By arrangement with Mr Simmons and because, at the end of the day on 25 November 2006, they were running late, it was decided that he would claim the standard rate for eight hours. By this means, according to Mr Clynch, he avoided the chore of itemising the additional equipment used and the hours worked with that equipment. He claimed that the timesheet understated his claim by $40. 13 Mr Clynch said that Mr Simmons concurred in this approach. I have already noted that Mr Simmons signed the timesheet certifying that the services as claimed were provided. There was no evidence to the contrary from Mr Simmons. 14 Mr Clynch said that on 2 December 2006 he arrived at the site at 6.30am and stayed until 11.30am. The bobcat was not used because it was wet and the ground was soft and it was apparently placed on standby, for which a rate was specified in the contract. Rather than do nothing, Mr Clynch said he assisted with labouring work and provided half a roll of a material identified as terra firma to the Council for the purposes of the sitework. He said the claim in the timesheet represented the hours that he was on the site and working. Again, the timesheet was signed by Mr Simmons and again, there was no evidence to counter Mr Clynch's claims from Mr Simmons, or any other Council witness. It will be noted that again the timesheet did not accurately represent the work undertaken by the plaintiff or the claim made. 15 There was no direct evidence from the Council to suggest that either of these explanations was untrue. I allowed into evidence material in affidavits, relied upon by the Council of allegations and complaints made which prompted its investigation. This material was admitted only as to the fact that the complaints were made and not as to the truth of the facts asserted in the complaints. 16 Mr Clynch was questioned as to why these explanations were not offered to the Council at the time of the interview on 5 December 2006. He explained that he had not been prepared for the interview and he had not been told in advance of the purpose of the meeting. He stated that Mr Robson on the morning of 5 December asked him to go into the Council to initial some changes to the timesheet so that he could get paid. The Council did not take issue with this evidence. 17 He said he was unaware of any allegations in respect of the timesheets until he attended the meeting with the Council officers already named. The Council took no issue with this evidence. 18 He was then asked questions by Mr McKinnon, who told him his answers would be used against him in a court of law and that the matter would be sent to ICAC. The Council took no issue with this evidence. 19 He was informed by Mr McKinnon that the Council had evidence to establish that the timesheets were falsified but refused his requests that he be provided with the evidence. The Council took no issue with this evidence. He stated that he told Council officers he could clarify matters if he could go and get his diary which was then in his vehicle parked in the Council's carpark. He was not permitted to do so. Only Mr McKinnon for the Council was asked about this evidence and he said he did not remember any request from Mr Clynch that he be given the opportunity to check his diary in order to respond to the questions raised. 20 Mr Clynch said he decided that the Council officers concerned had predetermined the issue against him and that there was no further point in discussing it. 21 In response, the Council's witnesses gave evidence in which they agreed that they did not give Mr Clynch access to the evidence they said they had that supported their allegations, nor did they give him the names of their informants. They agreed that notes taken at the interview were not read to interviewees and that interviewees were not asked to sign them. They agreed that questions were prepared prior to the interview and further developed in response to the answers given. They agreed that there had been no discussion in respect of claims made in respect of the other days in the weeks under consideration. They agreed that they had not checked the terms of the contract with the plaintiff before they recommended to the General Manager that the contract be terminated. FINDINGS 22 The result of this analysis is that I make the following findings. (1) As conceded by Mr Clynch, the timesheets did not accurately reflect the work done or the times at which the work was done in the weeks ending 25 November 2006 and 2 December 2006. (2) While, on one view, it might be said that the timesheets were deliberately falsified, the evidence of Mr Clynch was that the claims made in the case of 25 November 2006 were done after discussion with Mr Simmons and that in the case of both 25 November and 2 December 2006, the claims were made with Mr Simmons' authority, as evidenced by his signature on the certificate on the timesheet. (3) The process adopted by Council's officers to investigate the allegations were flawed so that, not only was the plaintiff denied natural justice, it did not establish a factual basis for the allegations made. The process provided no more than a basis for suspicion that the plaintiff was claiming from the Council, amounts greater than those to which it might be entitled and that the discrepancies, if any, were relatively minor in dollar terms. 23 The contract made provision for the following steps to be taken in such circumstances. Clause 27 provided for payment claims to be certified by the Council's representative, in this case Mr Simmons. This was complied with by the plaintiff. 24 Clauses 27.6 and 27.7 of the contract set out a procedure to deal with disputed claims that required that Council prepare a payment schedule, effectively detailing the amount that the Council proposed to pay and the reasons for any withholding of payment. The Council did not do this. 25 Clause 29 dealt with termination, giving the Council the right to terminate the contract if a contractor committed a breach of the contract and if the Council considered that damages might not be an adequate remedy. The clause itself is drafted in terms that are difficult to understand but, to make sense of it, I have read it as requiring the Council to give a contractor written notice to show cause. The right to terminate the contract under that clause arises only if the contractor fails to show cause. 26 Clause 29(3) sets out the requirements for the show cause notice which include an obligation to specify the alleged substantial breach and to give the contractor not less than 7 days within which to respond in writing. 27 Clause 9 of the contract deals with the giving of notices and provides a number of methods of service but it is clear that, unless specifically provided to the contrary, notices are required to be in writing. 28 The Council did not comply with these provisions, notwithstanding that it considered that there had been serious misconduct, amounting to a breach of contract by the plaintiff. 29 Clause 39 provides for disputes to be dealt with by negotiation and, if not settled, to be resolved through a dispute resolution process nominated by the Council. The Council did not comply with this provision. 30 The Council claimed that it was entitled to rely upon clause 29(6) which gave it the right to terminate the contract on the basis of convenience and without the need to give reasons. I rejected this proposition for two reasons. (1) This was not the basis upon which this contract was in fact terminated. it was terminated because Council formed the view that the plaintiff had committed a serious breach of the contract and, in that case, the provisions of clauses 27.6 and 27.7 as well as clause 29 applied. (2) Even if this clause had been available to the Council, I accept the arguments for the plaintiff that implied into its provisions must be the obligation to exercise the rights contained within it with good faith and fair dealing. The authorities supporting this proposition are summarised by the Court of Appeal in Burger King Corporation v Hungry Jacks Pty Limited (2001) 69 NSWLR 558. The Council did not conduct itself in accordance with these principles. 31 The result therefore is that, while it was entitled to terminate the contract in circumstances of substantial breach such as fraud and the submission of false timesheets, the Council did not observe the procedures set out in the contract that governed its exercise of those rights. I appreciate that the Council's officers acted with the best intentions and with the purpose of protecting the interests of the Council, but in terminating the contract, the Council was itself in breach to the point of repudiation of the contract and it must therefore be held liable to the plaintiff for the damage suffered as a result of its breach. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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