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- Unreported Judgment
SUPREME COURT OF QUEENSLAND
Santos Limited v Fluor Australia Pty Ltd & Anor  QCA 254
ABN 80 007 550 923
FLUOR AUSTRALIA PTY LTD
ABN 28 004 511 942
Appeal No 8813 of 2020 SC No 12939 of 2016
Court of Appeal
General Civil Appeal
Supreme Court at Brisbane – Unreported, 16 July 2020 (Bradley J)
17 November 2020
9 November 2020
Sofronoff P and Fraser JA and Henry J
Appeal dismissed with costs.
PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – DISCOVERY AND INTERROGATORIES – DISCOVERY AND INSPECTION OF DOCUMENTS – DISCOVERY OF DOCUMENTS – DISCRETION OF COURT AND POWER TO ORDER – where the appellant and the respondents are parties to contractual arrangements by which the first respondent agreed to carry out certain engineering and construction works in relation to a coal seam gas project – where the contract provided for labour costs, the payment of which would be made according to a set of agreed rates – where during the course of the litigation the parties agreed to a disclosure protocol – where the appellant applied for a further order for disclosure regarding documents that record or reveal labour costs, project level overhead costs and corporate, general and administrative overheads, as well as documents that record or reveal the components which comprise each of the rates contained in a table in the Contract and the methodology or basis upon which those rates were calculated – where the appellant tendered expert evidence, the effect of which was that the expert required access to the documents sought in order to form a view as to whether the pleaded allegation is correct or not – where the affidavit of the appellant’s solicitor showed that the solicitor’s “understanding” was the basis for the appellant to draw an inference which resulted in the allegations in the statement of claim that the respondents had charged the appellant an amount that included an impermissible charge for “fee and profit” – where this application was dismissed by the learned judge of first instance – where the appellant appeals the learned judge of first instance’s discretionary ruling concerning practice and procedure – whether the appellant has established an error of fact or law – whether the appellant has demonstrated that a substantial injustice has been occasioned to the appellant
Uniform Civil Procedure Rules 1999 (Qld), r 367
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170;  HCA 39, cited In re the Will of F B Gilbert (dec) (1946) 46 SR (NSW) 318;  NSWStRp 24, cited
P L O’Shea QC, with J Mitchenson, for the appellant
D B O’Sullivan QC, with D M Turner, for the respondents
Corrs Chambers Westgarth for the appellant
Jones Day for the respondents
- THE COURT: The appellant and the respondents are parties to contractual arrangements by which the first respondent agreed to carry out certain engineering and construction works in relation to a coal seam gas project. With respect to labour costs, the parties agreed that payment would be made according to a set of agreed rates. Relevantly, the contract provided:
“Schedule 3.1 Terms of Compensation
The purpose of this document is to describe the payments to be made to the Contractor by the Company in consideration of the performance by the Contractor of the Work under the Contract.
5.0 Indirect Home Office Services
The Contractor may only engage a person to perform Work under the Contract where the Contractor has obtained the Company’s prior written consent.
The Contractor may not claim reimbursement for any member of the Contractor’s Personnel whose engagement in the Work has not been approved in writing by the Company.
5.1.2 Remuneration at Hourly Rates (Table 5.2)
The Contractor shall be reimbursed for the Approved Hours expended by the Contractor’s Personnel in the performance of the Work (including in respect of Variations) at the agreed hourly rates set out in the table below…”
- There followed a table that set out the hourly rate of payment against particular “Labour Grades” which are defined elsewhere.
- Clause 5.1.3 provided:
“5.1.3 Costs included in Rates
The agreed hourly rates set forth in Table 5.2 above are deemed to include:
- (b)Annual Leave;
- (d)Public holidays;
- (f)Worker’s compensation insurance;
- (g)Payroll tax and insurances;
- (h)Sick leave, compassionate leave and other special leave;
- (i)Long service leave;
- (j)Location allowance;
- (k)Superannuation contributions and other superannuation requirements;
- (l)Staff medical benefits;
- (m)Any other component of statutory and payroll burden costs;
- (n)An allowance for consumables, administration expenses, insurances and compliance with statutory and the Company’s safety regulations; and;
- On first impression, one might read these provisions to mean that the first respondent, who is the “Contractor”, can charge the appellant, who is the “Company”, for the work done by its designated employees only at the stipulated rates for each category of employee and that, certain component expenses having been “deemed” to be incorporated in such stipulated rates, the Contractor can have no further claim for labour.
- However, the appellant urges a different meaning. As plaintiff in this proceeding it alleges:
“275 In the circumstances pleaded in paragraphs 246 to 274 above (which were known to both the Plaintiff and the First Defendant at the time of entry into the Contract), on the proper construction of clauses 5.1.2 and 5.1.3 of Schedule 3.1 of the Contract, the First Defendant:
- (a)represented and warranted that the rates stipulated in Schedule 3 of the Contract in respect of Contractor’s Personnel had been calculated on the basis that they did not include any allowance on account of fee or profit;
- (b)was not entitled to recover any fee or profit as part of the agreed hourly rates.
276 In breach of clauses 5.1.2 and 5.1.3 of the Contract, the hourly rates set out in Table 5.2 in Schedule 3.1 of the Contract:
- (a)exceeded the amount required to reimburse the First Defendant for the actual costs it incurred as a consequence of the Contractor’s Personnel performing Work under the Contract; and
- (b)thereby, in breach of Contract provided a fee or profit to the First Defendant (Labour Rates Profit)
The amount pleaded in paragraph 276(b) above is the difference between the amount the First Defendant claimed and was paid based upon the agreed hourly rates and the amount the First Defendant would have been paid if the agreed hourly rates did not exceed the actual costs incurred by the First Defendant as a consequence of the Contractor’s Personnel performing Work under the Contract.
The Total actual costs incurred by Fluor Australia as a consequence of the Contractor’s Personnel performing the Work under the Contract were:
- (a)AUD $186,893,358;
- (b)USD $80,641,985;
- (c)GBP £5,135,277;
- (d)EUR €451,772.
The total amounts claimed by the First Defendant (using the hourly rates set out in Table 5.2 of Schedule 3.1 of the Contract) and paid by the Plaintiff for performance of the Work under the Contract by the Contractor’s Personnel were:
- (e)AUD $293,116,334;
- (f)USD $164,896,898;
- (g)GBP £7,488,418;
- (h)EUR €724,328.
The total Labour Rates Profit was therefore the sum of:
- (i)AUD $106,222,976;
- (j)USD $84,254,913;
- (k)GPB £2,353,141; and
- (l)EUR €272,556.”
- In their defence, the respondents allege:
“275. As to paragraph 275 of the Second Amended Statement of Claim, the Defendants:
- (a)repeat and rely on the matters pleaded in answer to paragraphs 246 to 274 of the Second Amended Statement of Claim;
- (b)deny the allegation that the circumstances pleaded in paragraphs 246 to 274 of the Second Amended Statement of Claim were known to both the Plaintiff and First Defendant at the time of entry into the Contract. The direct explanation for the Defendants’ belief that the allegation is untrue is that except to the extent the Defendants have admitted the allegations in paragraphs 246 to 274, the allegations in 246 to 274 are not true and, as a result, were not known to the Plaintiff and First Defendant.
- (c)denies the allegation in subparagraph 275(a). The direct explanation for the Defendants’ belief that the allegations in subparagraph 275(a) are untrue is:
- (i)the matters pleaded in answer to paragraphs 246 to 274 of the Second Amended Statement of Claim;
- (ii)the First Defendant did not represent and warrant that the rates stipulated in Schedule 3 of the Contract in respect of Contractor’s Personnel had been calculated on the basis that they did not include any allowance on account of fee on profit as alleged or at all; and
- (d)denies the allegation in subparagraph 275(b). The direction [sic] explanation for the Defendants’ belief that the allegation in subparagraph 275(b) is untrue is:
- (i)the matters pleaded in answer to paragraphs 246 to 274; and
- (ii)on the proper construction of the Contract, clauses 5.1.2 and 5.1.3 of Schedule 3.1 of the Contract do not preclude the First Defendant from recovering any fee or profit as part of the hourly rate.
- The Defendants deny paragraph 276 of the Second Amended Statement of Claim. The direct explanation for the Defendants’ belief that the allegations in paragraph 276 are untrue:
- (a)is the matters pleaded in answer to paragraph 275 of the Second Amended Statement of Claim;
- (b)the amounts alleged in the particulars to paragraph 276 are based on direct labour costs only and do not account for all costs incurred as a consequence of the Contractor’s Personnel performing Work under the Contract, including the following costs:
- (i)project level overhead costs; and
- (ii)corporate general & administrative overheads; and
- (c)by reason of the matters pleaded in subparagraph (b) above, the amounts claimed in subparagraph 276(b) of the Second Amended Statement of Claim are inaccurate.”
- By a letter dated 2 June 2020 the appellant’s solicitors sought disclosure of a certain category of documents described as follows:
“Documents that record or reveal:
- (a)the components (including the amount or value of each component) which comprise each of the rates stipulated in Table 5.2 of Schedule 3 of the Contract; and
- (b)the methodology or basis upon which those rates were calculated.”
- The request referred to paragraphs 275 and 276 of the Second Amended Statement of Claim and the plea by way of defence as the basis for the request. The respondents’ solicitors replied on 8 June 2020 declining to disclose the documents.
- During the course of this litigation the parties had agreed to a disclosure protocol which is subject to the qualification that it is to operate “until further order of the Court”. The appellant applied for a further order for disclosure as follows:
“TAKE NOTICE that the applicant is applying to the Court for the following orders:
1 Pursuant to r 223, and further or alternatively r 367, of the Uniform Civil Procedure Rules 1999 (Qld), within 7 days of this order being made, the Defendants give disclosure of the following documents in a form which complies with the requirements set out in the Document Plan and Document Management Protocol:
- (a)Documents that record or reveal:
- (i)the components (including the amount or value of each component) which comprise each of the rates stipulated in Table 5.2 of Schedule 3 of the Contract; and
- (ii)or the methodology or basis upon which those rates were calculated.
- (b)Documents that record or reveal the calculation or build-up of the hourly labour cost rates contained in the CJI3 dataset including (but not limited to) the HR Module for all Fluor Personnel.
- (c)Documents that record or reveal the amount and nature of the project level overhead costs and corporate, general & administrative overheads referred to in paragraphs 276(b)(i) and (ii) of the Second Amended Defence and Counterclaim filed on 11 February 2019 including (but not limited to) the following:
- (i)documents that record or reveal the overhead costs (identified by cost element code or other identifier) that are included in the CJI3 dataset;
- (ii)documents that record or reveal the adjustments made to the CJI3 dataset each month before it was billed to Santos in its monthly payment claims and the ‘job cost ledger’ was prepared; and
- (iii)documents that record or reveal the corporate, general & administrative costs billed or otherwise allocated to this Project (including estimates) and any adjustments made in SAP.
- (d)Invoices between the non-Australia Fluor entities, and third party labour hire firms that provided labour whose costs were claimed by the First Defendant from, and paid by, the Plaintiff on the Project.”
- Bradley J heard the application and dismissed it and the appellant now appeals against his Honour’s order.
- Pursuant to the contract, the appellant was entitled to demand certain information from the first respondent and, having made a demand and after some disputation, the parties agreed to a consent order which provided, relevantly:
“1. Within 21 days of this order the Respondent will, pursuant to clause 41.2(a) of the Contract provide access to the SAP System used by the Respondent limited to information identified by the unique work breakdown structure codes incorporating the reference G2NG.
- The information referred to in paragraph 1 above, will be accessed in the presence of the Applicant or its nominees under the direct supervision of the Respondent, which shall include the Respondent providing a computer operator to facilitate such access at the Respondent’s office 6/52 Merivale Street, South Brisbane.
- The Respondent will cause the information accessed in paragraph 1 above to be extracted directly from the SAP System used by the Respondent into text flat files in a delimited format under the supervision of the Applicant or its nominees and provide the information extracted to the Applicant or its nominees in electronic format.”
- In compliance with the order, the respondents delivered a document which listed the costs which, according to their books of account, disclosed expenditure items which bore the code “G2NG”. This document was entitled “CJI3”. Evidence was led before his Honour which demonstrated that the allegations in paragraph 276 of the statement of claim originated in the appellant’s study of CJI3.
- At the hearing of this application, Mr Geoffrey Telfer, a senior officer of the first respondent, Fluor Australia Pty Ltd, gave evidence that the respondents use accounting software called “SAP” to manage their project accounting. The respondents have many projects underway. SAP allows a code to be assigned to a particular project in order to identify accounting entries that pertain to it. Mr Telfer said that Fluor Australia also recorded in its books costs that it incurred in relation to the project but which it did not charge to the appellant. These charges were assigned codes that were different from the costs chargeable to the appellant. That is, they did not carry the code G2NG. He gave some examples of each of these. Mr Telfer also said that Fluor Australia as well as other companies within the Fluor Group, which operate internationally, incur various costs which have to be incurred in order to perform any project and to conduct business generally. For their own internal purposes costs of this latter kind may be attributed to particular projects in whole or by the making of a judgment that part of a cost should be attributed in that way. In many cases such attributions of costs must be achieved “on an arbitrary basis” because exactitude is not possible in practical terms. These kinds of costs are also given codes within SAP but not G2NG. Finally, some costs are not attributed to any project because they constitute general overheads although, strictly speaking, some portion of these costs may actually be referrable to a particular project as a matter of fact. Expenses of this kind also do not bear the G2NG code.
- Mr Telfer’s evidence was corroborated by the evidence of Mr Anthony Smith who is employed as part of Fluor Australia’s “Project Controls team”. Mr Smith said that there were costs that were incurred by Fluor Australia in relation to the project but which were not chargeable to, and were not charged to, the appellant. These costs were still recorded in SAP as part of the respondents’ ordinary books of account.
- Mr Telfer and Mr Smith both gave evidence that CJI3 contains a listing of the costs attributable to the project which were contractually chargeable to the appellant. CJI3 does not contain any costs incurred in relation to the project for which the appellant is not liable. However, these were costs that may have gone into the respondents’ establishment of the contractual rates of pay.
- The appellant’s representatives’ study of the content of CJI3 revealed to them a significant difference between the total of the costs for labour set out in that document and the total of the sums which the appellant paid to Fluor Australia for labour performed on the project. The appellant’s solicitor, Mr Andrew Stephenson, gave the following evidence in paragraph 11 of his affidavit affirmed on 11 June 2020:
“It was my understanding that the information that I received on behalf of the Plaintiff pursuant to the Order would include all of the costs the First Defendant incurred on the Project, including overheads. At no time was I aware that there were costs outside the SAP system relevant to the GLNG project, nor did the First Defendant state that costs could be found in its financial reports which were not recorded in the SAP system”.
- It was upon the basis of this understanding that the appellant drew an inference which resulted in the allegations in paragraphs 275 and 276 of the statement of claim, namely, that in breach of the alleged term the first respondent had charged the appellant an amount that included an impermissible charge for “fee and profit”, which was alleged to be the difference between the costs in CJI3 and the amounts actually paid for labour. As can be seen from the defence, the respondent put that allegation in issue by alleging that the sums charged “are based on direct labour costs only”.
- There are several problems with the pleading which are germane to the present appeal. First, as Mr Stephenson candidly conceded in paragraph 11 of his affidavit, the fact from which the inference of overcharging was drawn was not the subject of actual knowledge but only an “understanding”. It will be noticed that the consent order did not oblige the respondents to list all costs incurred on the project; it only required the respondents to give the appellant access to its records “limited to information identified by the unique work breakdown structure codes incorporating the reference G2NG”. On the unchallenged evidence, that code was not assigned to sets of costs for which the respondents could make no claim and, as a result, CJI3 did not list all of the respondents’ costs for labour on the project. On the evidence in this matter, Mr Stephenson’s understanding was really an assumption which was not justified and would not be justified unless he obtained further information to make good his assumption. There was no suggestion made at the hearing of this appeal that the evidence of Mr Telfer and Mr Smith was not to be relied upon.
- An expert retained by the appellant, Mr Matthew Fehon, gave evidence that, being aware of the issues raised by the pleadings, he had studied CJI3. His affidavit sworn on 10 June 2020 says:
“25 I have identified a variance between the amount recorded in the Paid Values Summary, as paid by Santos, and the costs recorded in the CJI3 Dataset of AUD $272 million, USD $163 million, GBP $2.2 million and EUR $780 thousand (Variance).
26 In order to tests and understand the make-up of the Variance (including whether it is located in the labour rates and is profit) I will require additional data and documents than I have available to me at present.”
- After explaining how, in his experience, costs and overheads are usually dealt with in similar circumstances, Mr Fehon said:
“20 I have observed in this paragraph that Santos contends it paid to Fluor amounts associated with Fluor’s labour costs which included profit. I have been engaged by the Plaintiff to consider whether the Defendants did make any ‘Additional Profit’ beyond the fee allowed under the contract and to consider whether that amount is attributable to the rates the First Defendant charged to the Plaintiff, or if not, what else it could be attributed to. …”
- He concluded, relevantly:
“53 … I therefore need to confirm that the costs recorded in the CJI3 Dataset do not include anything on account of the overheads associated with “Fluor global”, so that any addition of the overheads recorded in the Financial Reports to the labour costs recorded in CJI3 Dataset is appropriate. Accordingly, in respect of the intercompany employees it is necessary to confirm that the amounts charged do not include anything on account of overheads associated with “Fluor global”.
54 … I require this information by origin and labour grade to assist me in understanding if there is profit in the labour rates or if the amounts are overheads as the Defendants contend.
55 … I require these documents to assist me in understanding if there is profit in the labour rates or if the amounts are overheads as the Defendants contend.
56 … I require these fields, and any other fields that have been omitted from the CJI3 Dataset, to undertake my analysis of the Variance.
57 In order to test and understand the make-up of the Variance, I require the following information to assist me to better understand the labour rates and the actual costs associated with the amounts that Fluor has billed to Santos on the Project …”
- We respectfully agree with Bradley J that the effect of this evidence is that Mr Fehon requires access to the documents sought in order to form a view as to whether the pleaded allegation is correct or not. The significance of this is that the appellant is seeking documents to determine whether the inference it has drawn from CJI3 is correct rather than to prove a case that it is confident exists.
- Mr O’Shea QC, who appeared with Mr Mitchenson of counsel for the appellant, submitted that it was unfair to use Mr Fehon’s evidence in this way. This was because Mr Fehon’s evidence was not led to prove the appellant’s case, so it is not significant that it did not do so. That much may be accepted. It may also be accepted that, when the statement of claim was settled, the drafter accepted the propriety of making the plea although the only basis for it was, as it now appears, Mr Stephenson’s understanding of the facts. However, it is not possible to ignore the facts as they have emerged and what has emerged is that this is a case that had a fragile factual and legal foundation which, on the evidence as it stands at present, does not stand up to scrutiny. It is also significant to the discretion that the appellant opted to appeal against his Honour’s order in preference to amending its claim. The inference is that, on the materials available to the appellant, this is the best pleading that can be put forward.
- The extent of information that a pleader requires before an allegation can properly be made in a pleading is not capable of precise definition. Cases that consider this question usually concern pleadings which allege fraud. The appellant rightly points out that the respondents have made no move to strike out its plea. However, the basis upon which the plea might have been challenged in that way only emerged in the course of the appellant’s application, partly from facts revealed in the appellant’s evidence. The appellant also points to the content of the plea in the defence and submits that the allegations of fact concerning the components of the amounts charged themselves give rise to a litigious issue. In our view, neither the failure to apply to strike out the allegations nor the matters pleaded in response can improve the substance of the allegation in the statement of claim. Bradley J concluded, on the basis of the evidence led by the appellant from Mr Fehon, some of which is quoted above, that the documents now being sought were needed to see if there was a case rather than to prove a case. Mr Fehon did not say that the variance which he observed was some evidence that the allegation in paragraph 276 was true. That showed, as his Honour said, that neither Mr Fehon nor the appellant know whether the claim made in paragraph 276 is correct or not.
- Second, the pleas in paragraphs 275 and 276 of the statement of claim proceed upon the footing that, because the costs actually incurred on the job were significantly less than the costs reflected in the agreed contractual rates, it followed that the rates had been calculated by the respondents upon a false basis. However, there may be many reasons why a set of agreed rates for work might turn out to be very favourable to one party or the other. Somebody working at a fixed rate might feel a strong incentive to identify and execute efficiencies which could render the fixed rate as profitable as possible. The discovery of new productivity methods does not render false the basis for a calculation of rates when they were made if they were based upon an expectation which had a reasonable basis at the time. In short, the fact that an expectation does not come about does not render that expectation false, misleading or baseless when it was made.
- In sum, the pleaded case is based upon an inference to be drawn from an assumed state of facts. There was little justification for that assumption when it was relied upon and none has been put forward since. It was for the appellant to plead a case that was soundly based and, in the result and on the evidence of Mr Stephenson, Mr Telfer and Mr Smith, it has emerged that the case was based, at best, upon a shaky assumption to support a possible inference.
- In a case like the present, it was material for Bradley J to consider the basis for, or absence of basis for, the appellant’s case and the corresponding burden that would be placed upon the respondents if the order is made. Mr John Cooper, who is the respondents’ solicitor, gave evidence about the additional burdens that the further orders would place upon the respondents. He has also said that, in order to assist the appellant in understanding the respondents’ defence, the respondents have already endeavoured to give the appellant material beyond what was strictly required by the obligation of disclosure. Mr O’Shea submitted that Mr Cooper might have misconceived the scope of discovery. He pointed to various aspects of Mr Cooper’s affidavit to demonstrate this point. The problem with that submission is that the proposition was not put to Mr Cooper for a possible response. His evidence was not challenged because he was not cross-examined.
- In our respectful opinion, his Honour was right to think that, having regard to the defects in the appellant’s appreciation of the facts of the matter which led to the understanding which underlies the allegations and having regard also to the form of the pleading, this application was akin to a fishing expedition.
- This is an appeal against a discretionary order concerning practice and procedure. So far as the application was based upon the power to make directions conferred by UCPR r 367, it must be not be overlooked that sub-rule (2) provides that, in deciding whether to exercise the discretion to make an order or direction, the interests of justice are paramount. Mr O’Shea rightly accepted that this was the ultimate issue that Bradley J had to decide. The scope for judgment about how the interests of justice are to be served by a case management decision is very wide indeed. It is for this reason that an appellate court exercises particular caution when invited to review a decision pertaining to practice and procedure. Not only must there be an error of fact or of principle, but an appellant must demonstrate that the decision appealed from will work a substantial injustice. This is so because, if a tight rein were not kept upon interference with orders of judges of first instance in such cases, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably and costs heaped up indefinitely if an unrestrained right of appeal effectively transferred all exercises of discretion in interlocutory applications from a judge hearing an application to a Court of Appeal.
- In this case, for the reasons given, the appellant has failed to establish an error of fact or law. Nor has it demonstrated that a substantial injustice has been occasioned to the appellant, at least because the allegations have not been struck out and the appellant remains at liberty to pursue its pleaded case. It is free, subject to the rules, to amend to raise a better case if it has one and if it does so or if there is some other change in circumstances the appellant might become entitled to the disclosure it seeks.
- For these reasons the order dismissing the application was rightly made and the appeal should be dismissed with costs.
As well as paragraphs 280, 281, 283, 284 and 285, which raise other causes of action based on the same or similar facts.
See eg. Yorke v Lucas (1985) 158 CLR 661.
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 177 per Gibbs CJ, Aickin, Wilson and Brennan JJ.
In re the Will of F B Gilbert (dec) (1946) 46 SR (NSW) 318 at 323 per Jordan CJ.
- Published Case Name:
Santos Limited v Fluor Australia Pty Ltd & Anor
- Shortened Case Name:
Santos Limited v Fluor Australia Pty Ltd
 QCA 254
Sofronoff P, Fraser JA, Henry J
17 Nov 2020