Alstom Ltd v Yokogawa Australia Pty Ltd (No 7)  SASC 49
Alstom was the head contractor to an agreement with Flinders Power Partnership for the refurbishment of the Playford Power Station in Port Augusta, South Australia. Yokogawa Australia Pty Ltd was subcontracted for certain electrical, control and instrumentation works on the station’s refurbishment. There were significant delays to the head contract milestone dates, for which Alstom incurred loss; it was required to pay large sums to Flinders Power after settlement negotiations with respect to the delays.
Alstom brought proceedings in the Supreme Court against Yokogawa and sought to recover damages for loss caused by various delays to the head contract, for which it alleged Yokogawa was responsible. It held that Yokogawa was also required to meet subcontract milestone dates. Yokogawa denied liability and claimed that Alstom had breached implied obligations to provide information about the head contract works. The hearing lasted for 129 sitting days.
The Court rejected the majority of Alstom’s claims.
One of the questions to be decided was whether the subcontract, like the head contract, was a ‘turnkey’ contract, under which a contractor is required to design and achieve specified functional outcomes. The question turned on whether there were similar Performance Guarantees and milestone dates to those in the head contract.
The subcontract consisted of an Attachment, a Schedule and some “Special Conditions” which set out the changes to be applied to the terms of the head contract. The Special Conditions included:
- changing the names to reflect the parties to the subcontract
- replacing deadlines applicable to the Contractor under the head contract so that they would fall due three days earlier for the Subcontractor, and
- replacing references to “Works” with “Electrical and C&I Works”.
This drafting technique resulted in a number of problems for construing the contract.
For example, a provision taken from the head contract in relation to Performance Guarantees was held by the Court to be void for uncertainty when transported into the subcontract.
The Special Conditions substituted “ensure” with the phrase “ensure that the Performance Guarantees in any area which fall within the Subcontractor works scope [sic]” in the subcontract. This created the following, undeterminable phrase:
Subcontractor shall perform the EC&I Works in accordance with the terms and provision of this Electrical and C & I Contract and will ensure that Performance Guarantees in any area which fall within the Subcontractor works scope that the Refurbished Facility achieves the Performance Guarantees.
The Court held that even if the passage could be rewritten to give it superficial meaning, it would still be of no consequence in relation to the Performance Guarantees. When rewritten, the passage would refer to the subcontractor’s “works scope”, which could only be interpreted by reference to the works set out in the subcontract, not the head contract. By attempting to import a clause from the head contract, but by failing to consider the impact on the meaning of this clause in light of additional provisions, the contract failed to mirror the head contract.
The Court found that due to the drafting of the contract, Yokogawa was not under an obligation to meet any milestone dates.
The milestone provisions in the head contract were superimposed and slightly altered in the subcontract. Yokogawa was to perform the subcontract works three days before the head contract milestones.
This posed logistical difficulties such that works to be performed by Yokogawa would occur at illogical and practically impossible times. Further, steps in the subcontract works, which could realistically only be performed once, would be required to take place on multiple occasions.
As a result of such difficulties, the Court read the subcontract down to provide it with business efficacy. It held that Yokogawa was not under an obligation to meet any of its own milestone dates, but rather, could only be obliged to carry out the subcontract works so as to enable Alstom to achieve the head contract milestone dates. Whatever was originally intended, Yokogawa’s obligation was effectively reduced by the Court to one requiring completion of the electrical works within a reasonable time.
The superimposing drafting technique led to difficulties of construction and did not result in identical contracts. As a result, the subcontract was held not to be a turnkey contract. The Court recognised that this drafting technique may succeed when competently performed, but held that in this case such technique led to ambiguity, inconsistencies, lacunae and grammatical nonsense.
Another question was the extent of any obligations on Alstom, as head contractor, to provide important information to Yokogawa in respect of the entire project works.
The Court held that all commercial contracts contain an implied duty to cooperate. This requires parties to do all that is necessary to enable the other to have the benefit of the contract, and in Alstom’s case, to provide Yokogawa with regular updates and electronic copies of its works program which were able to be integrated into Yokogawa’s own program. The Court also recognised duties on Alstom not to prevent or hinder Yokogawa’s performance of the contract and to act in good faith and Yokogawa with necessary project information which it reasonably requested.
The Court held that as a result of Alstom’s failure to notify Yokogawa of important dates and to provide regular updates, information regarding site access, Alstom’s critical path and programming documents in a form which could be integrated with Yokogawa’s own plan, Yokogawa was unable to meet its obligations under the subcontract or request extensions of time. Yokogawa had apparently sought such information from Alstom on a number of occasions, but the information had been refused.
The decision highlights that great caution should be taken when drafting contracts for major works. Back-to-back drafting between head contract and subcontracts may have a substantial effect on the nature of the subcontract and the parties’ obligations thereunder.
The Court’s findings demonstrate that simply importing terms without properly considering their meaning in light of additional provisions may alter such terms so that they no longer mirror the head contract. Care and scrutiny ought to be applied when employing this technique to ensure that all intended obligations flow on to the subcontract.
In addition it will be important to recognise that, to the extent possible, information relating to critical pathways, important dates and developments in a project ought to be shared with subcontractors where they are likely to affect their ability to perform works. The duties to cooperate and to not hinder completion of a contract may well require a party to provide substantial information about the main works, and may affect a head contractor’s ability to recover damages where delay occurs.