Codelfa Construction Pty Ltd V State Rail Authority (NSW)

149 CLR 337
41 ALR 367

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(Judgment by: AICKIN J)

Between: Codelfa Construction Pty Ltd
And: State Rail Authority (NSW)

Court:

Judges: Stephen J
Mason J

Aickin JWilson J
Brennan J

Subject References:
Contract

Judgment date: 11 May 1982

Canberra

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Judgment by:
AICKIN J

The material facts, and the history of the various proceedings, upon which this appeal and cross-appeal depend are set out in other judgments and I do not repeat them here. I find it necessary however to set out in full certain provisions of the contract documents.

In these reasons I refer to Codelfa Construction Pty. Ltd. (the appellant) as "Codelfa" and to the State Rail Authority of New South Wales (the respondent and cross-appellant) as "the Authority". Not all the issues which have arisen in the course of the various proceedings below are still in dispute. It will be convenient to deal with the matters which are still in dispute under separate headings.

Implied Term

For the purpose of proceedings before Ash J. in the Supreme Court of New South Wales the Arbitrator made certain "Findings of Primary Facts" to which he refers in his award.

The first issue with which he dealt was whether there were any implied terms. His findings on this point were:

"14. The Parties to Contract ESR 1005 each entered into such Contract on the common and mutual understanding and on the basis that:

(a)

the works the subject of the Contract should and would be carried out by the Contractor on a 3-shift continuous basis six days per week and without restriction as to Sundays, and

(b)

the work to be performed was inherently of a noisy and disturbing nature and the work or substantial parts thereof was to be carried out in close proximity to areas of residential neighbourhood, and

(c)

no Injunction or other Restraining Order could or would be granted against the Contractor in relation to noise or other nuisance arising out of the carrying on of the said works on such basis.

15. The matter mentioned in paragraph 14(c) was represented by the Principal to the Contractor and was accepted as the situation by the Contractor prior to and at the time of entering into the Contract."

He then set out the evidence to which he had regard in making that finding. It is sufficient for present purposes to quote only pars 16, 17 and 19 which were as follows:

"16. The said works could not in fact be carried out by the Contractor in accordance with methods and programmes agreed to by the parties and in accordance with the contractual stipulations as to time of performance unless the works were carried out on the basis mentioned in paragraph 14(a) hereof.

17. In view of the foregoing neither party foresaw the likelihood or possibility of any restrictions being imposed on the carrying out of the works on the basis mentioned in paragraph 14(a) by reason of Injunctions or Restraining Orders issued by the Court on grounds of noise or other nuisance arising out of the carrying out of the works.

19. The said works could not in fact be carried out by the Contractor in accordance with methods and programmes agreed to by the parties without substantial noise and other disturbances arising therefrom or in connection therewith by reason of the inherently noisy and disturbing nature of the work."

He then found that there was to be implied a term as follows:

"to the effect that upon the issuing of the Restraining Orders and Injunctions referred to in paragraph 18 the Principal would grant to the Contractor a reasonable extension of time for the completion of the works and would advise the Contractor of the fact of the grant of the extension of time within a reasonable period after the issuing of the Restraining Orders and Injunctions became known to the Principal or ought to have become known to the Principal."

Arbitrator's Findings

In the course of his award, the Arbitrator said that at the request of the Authority he stated the matters (in addition to the contract documents) "to which I have had regard in making the above Findings namely, to certain evidence (summarised in my Findings of Primary Facts) as follows :-

(a)

Evidence of general tunnelling practice and of particular examples of such practice including that followed by a joint venture of which the Contractor was a member on another section of the Eastern Suburbs Railway (Contract ESR 1002).

(b)

Evidence that the nature and extent of the works anticipated by Contract ESR 1005 were such that completion within the time specified in the Contract suggested a three shift operation.

(c)

Evidence as to matters including but not limited to (a) and (b) above which was part of the background against which the Contract was entered into pointing to the Contractor and Principal each accepting and assuming that the work was to be carried out on a three shift basis and would be immune from interference from restraining orders and injunctions."

It was on the basis primarily of those findings that the Arbitrator found that there was to be implied into the contract the term which I have quoted above.

The Arbitrator felt precluded by law from considering the question of frustration. He rightly regarded himself as bound by the decision of the Privy Council which had established that frustration was not within the jurisdiction of an arbitrator, notwithstanding the existence of a later House of Lords decision to the contrary. No complaint is made of the Arbitrator's failure to deal with frustration or about the decision of Ash J. that he also was obliged to follow the decision of the Privy Council.

In the result the Arbitrator did not consider frustration and the Court of Appeal of the Supreme Court of New South Wales did find it necessary to consider that question. Ash J. considered frustration but concluded that the contract had not been frustrated. Both the Arbitrator and Ash J. thought that a term should be implied in the contract which excused the Contractor from performance in accordance with the terms of the contract in the events which happened. They differed somewhat as to the form of the term which was to be implied but in my opinion the differences are not really material.

Logically the question whether there is to be a term implied into the contract must be dealt with before the question of possible frustration can arise. Accordingly I must first deal with the term implied by the Court of Appeal. One approach to this question has been to postulate the presence of the "officious bystander" who is present throughout the negotiations and intervenes before their conclusion. This has been the formula used since MacKinnon L.J. introduced it in Shirlaw v. Southern Foundries (1926) Ltd. [1939] 2 KB 206 , at p 227. It is not always a helpful or useful process and there are particular problems in applying the traditional approach to cases of building or construction contracts. I note in passing that Lord Denning's attempt to "kill off" the officious bystander in Liverpool City Council v. Irwin [1976] 1 QB 319 did not commend itself to the House of Lords in the same case [1977] AC 239 . However it seems no longer the exclusive means of approaching the question.

The first problem is that the manner in which the officious bystander formulates his question will often determine the answer which the parties will give. In the present case if the question put was "What will be the position if the Authority's legal advice about immunity is wrong?", the answer would be very different from that which might be received to the question "What will happen if an injunction is granted?". Yet it seems to me with respect that the former question is equally, if not more, appropriate. One may formulate a further query - must the officious bystander be satisfied with the first response or may he pose a second question, and if not, why not?

The second problem, which does not seem to have been expressly adverted to in the authorities is the manner in which the doctrine of implied terms should be applied in the case of "contracts of adhesion" where the terms are not the result of negotiation (except as to price) but are provided in a standard form designed by one party upon which the other must tender. In the present case the only questions for negotiation were the price and one aspect of the mode of performance of part of the work.

It does not however follow that there is no room for implied terms in the case of standard form contracts, but undoubtedly it will be more difficult to imply the existence of unexpressed terms in such cases. The calling for tenders by a government authority upon its own standard form of contract suggests that it contains the only terms on which it is prepared to contract, and that a tender on the basis of different terms would be instantly rejected. It must however remain possible that there is some matter to which neither party has adverted but to which both would readily assent if it were brought to their attention. In the case of standard form contracts however it seems much more likely that, although neither party had considered the point raised, they might not have readily agreed upon a common solution to the new problem. They must however be considered to be "reasonable men" and not subject to such human failings as pride of authorship or sudden caution induced by a possibility which they had not contemplated. It would seem likely that the response to the question which I have posed would be "You must obtain your own legal advice" rather than "We are completely confident that our advice is right but you will be fully compensated if it turns out to be wrong and an injunction is granted".

The possible answers to the officious bystander seem to me to be a matter for speculation and are not a matter about which I can feel sufficient certainty to warrant the implication of a term.

The Arbitrator expressed the implied term int he terms of the very event which happened, i.e. the grant of an injunction restraining work on the night shift. That is, to concentrate on the particular event which happened rather than upon the nature of the term to be implied in advance in order to cover contingencies which had not occurred to either party. The question must however be considered as at the date of the contract and with reference to the significance of possible events.

Ash J. found an implied term which he expressed in more general terms and more in accordance with what the parties might have formulated in advance if they had adverted to the possibility that the Authority or its legal advisers were wrong in saying that the Contractor would be protected from injunctions and any other legal action in respect of nuisance. In the Court of Appeal the implied term was expressed in a slightly different manner but not so different as to require the view that difficulty of expression made it either impossible or unusually difficult to imply a term. If a term were to be implied I would prefer the version adopted by the Court of Appeal subject to the insertion therein of the words "any losses or damages thereby suffered including" after the word "against" and before the words "any additional costs".

Frustration

I turn therefore to the question of frustration. The Contractor's argument was that the grant of the injunction had such a drastic effect upon its construction programme, both physically and financially, that it was transformed into an obligation radically different from that which it had undertaken on the common erroneous understanding.

It was argued for the Contractor that the completion of the works within the contract period specified became impossible. That impossibility arose on the one hand from the nature of the work to be performed and the contract period within which it was required to be completed, and on the other hand from the injunctions which prevented the tunnelling work being performed on a three-shift basis with freedom to work on Sundays, in the manner which the Arbitrator found was contemplated by the parties: see the Arbitrator's findings, pars 14-19, which are quoted above.

This produced the result that it was unlawful to complete the works in the manner contemplated and within the time required by the contract because the only manner of operation which could produce that result was prohibited by the injunction. The completion of the works within the contract time was, to the knowledge of both parties, dependent upon working three shifts continuously and on Sundays when thought desirable. That mode of operation was prohibited by the Court order.

The manner in which the doctrine of frustration is generally expressed has undergone some change, though it has not been suggested that its content has changed. When it was first developed it was usual to express it as arising from an implied term: see, for example, F. A. Tamplin Steamship Co. Ltd. v. Anglo-Mexican Petroleum Products Co. Ltd. [1916] 2 AC 397 , at pp 403-404 , per Lord Loreburn, Scanlan's New Neon Ltd. v. Tooheys Ltd. (1943) 67 CLR 169 , where Latham C.J. adopted this view, but the other two members of the Court adopted a view much closer to that now prevailing. See also British Movietonews Ltd. v. London and District Cinemas Ltd. [1952] AC 166 , at p 184. The doctrine is now generally expressed as depending on changes in the significance of the obligations undertaken and the surrounding circumstances in which the contract was made. This development was explained by the House of Lords in Davis Contractors Ltd. v. Fareham Urban District Council [1956] AC 696 ; see especially per Lord Reid (1956) AC, at pp 719-721 , and per Lord Radcliffe (1956) AC, at pp 727-729. It is convenient to quote part of what Lord Radcliffe said (1956) AC, at pp 728-729 :

"Lord Loreburn ascribes the dissolution to an implied term of the contract that was actually made. This approach is in line with the tendency of English courts to refer all the consequences of a contract to the will of those who made it. But there is something of a logical difficulty in seeing how the parties could even impliedly have provided for something which ex hypothesi they neither expected nor foresaw; and the ascription of frustration to an implied term of the contract has been criticized as obscuring the true action of the court which consists in applying an objective rule of the law of contract to the contractual obligations that the parties have imposed upon themselves. So long as each theory produces the same result as the other, as normally it does, it matters little which theory is avowed (see British Movietonews Ltd. v. London and District Cinemas Ltd. (1952) AC, at p 184 , per Viscount Simon). But it may still be some importance to recall that, if the matter is to be approached by way of implied term, the solution of any particular case is not to be found by inquiring what the parties themselves would have agreed on had they been, as they were not, forewarned. It is not merely that no one can answer that hypothetical question: it is also that the decision must be given 'irrespective of the individuals concerned, their temperaments and failings, their interest and circumstances' (Hirji Mulji v. Cheong Yue Steamship Co. Ltd. [1926] AC 497 , at p 510 ). The legal effect of frustration 'does not depend on their intention or their opinions, or even knowledge, as to the event.' (1926) AC, at p 509. On the contrary, it seems that when the event occurs 'the meaning of the contract must be taken to be, not what the parties did intend (for they had neither thought nor intention regarding it), but that which the parties, as fair and reasonable men, would presumably have agreed upon if, having such possibility in view, they had made express provision as to their several rights and liabilities in the event of its occurrence' (Dahl v. Nelson (1881) 6 AppCas 38, at p 59 per Lord Watson). By this time it might seem that the parties themselves have become so far disembodied spirits that their actual persons should be allowed to rest in peace. In their place there rises the figure of the fair and reasonable man. And the spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself. So perhaps it would be simpler to say at the outset that frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do.

There is, however, no uncertainty as to the materials upon which the court must proceed. 'The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred' (Denny, Mott & Dickson Ltd. v. James B. Fraser & Co. Ltd. [1944] AC 265 , at pp 274-275 , per Lord Wright). In the nature of things there is often no room for any elaborate inquiry. The court must act upon a general impression of what its rule requires. It is for that reason that special importance is necessarily attached to the occurrence of any unexpected event that, as it were, changes the face of things. But, even so, it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

In his judgment in Brisbane City Council v. Group Products Pty. Ltd. (1979) 145 CLR 143 Stephen J. (with whom Murphy J. agreed) considered the question of frustration and reviewed many of the cases in a manner with which I respectfully agree. Apart from the above more extensive quotation from Lord Radcliffe's speech, I cannot do better than refer to and adopt all that Stephen J. said at pp. 159-163.

Since the judgment of Stephen J. was delivered there have been two further decisions of the House of Lords which I should mention. The first was National Carriers Ltd. v. Panalpina (Northern) Ltd. [1981] AC 675 . The primary question in that case was whether the doctrine of frustration could be applied to a lease. A majority of their Lordships decided that it could, but "hardly ever". Lord Hailsham L.C. discusses the doctrine generally and the leading cases at pp. 687-689. He sets out the five theories of frustration which have been propounded and indicates a preference for the formulation by Lord Radcliffe in Davis Contractors [1956] AC 696 which I have quoted above. Lord Wilberforce said of the doctrine of frustration (1981) AC, at p 693 :

"Various theories have been expressed as to its justification in law: as a device by which the rules as to absolute contracts are reconciled with a special exception which justice demands, as an implied term, as a matter of construction of the contract, as related to removal of the foundation of the contract, as a total failure of consideration. It is not necessary to attempt selection of any one of these as the true basis: my own view would be that they shade into one another and that a choice between them is a choice of what is most appropriate to the particular contract under consideration. One could see, in relation to the present contract, that it could provisionally be said to be appropriate to refer to an implied term, in view of the grant of the right of way, or to removal of the foundation of the contract - viz. use as a warehouse. In any event, the doctrine can now be stated generally as part of the law of contract; as all judicially evolved doctrines it is, and ought to be, flexible and capable of new applications."

Lord Simon of Glaisdale said (1981) AC, at p 700:

"Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance."

The most recent decision is Pioneer Shipping Ltd. v. B.T.P. Tioxide Ltd. [1982] AC 724 . Lord Diplock (1982) AC, at p 738 said that there were two questions and that:

"(T)he other was the question of frustration which, as was held unanimously by this House in Tsakiroglou & Co. Ltd. v. Noblee ThorlG.m.b.H. [1962] AC 93 , is never a pure question of fact but does in the ultimate analysis involve a conclusion of law as to whether the frustrating event or series of events has made performance of the contract a thing radically different from that which was undertaken by the contract; however closely that conclusion of law may seem to follow from a commercial arbitrator's findings as to mercantile usage and the understanding of mercantile men about the significance of the commercial differences between what was promised and what in the changed circumstances would now fall to be performed."

Lord Roskill (1982) AC, at p 751-752 said that the decision in National Carriers showed that the House of Lords had approved the "now classic statement of the doctrine by Lord Radcliffe" in Davis Contractors [1956] AC 696 which he set out and added -

"It should therefore be unnecessary in future cases, where issues of frustration of contracts arise, to search back among the many earlier decisions in this branch of the law when the doctrine was in its comparative infancy. The question in these cases is not whether one case resembles another, but whether applying Lord Radcliffe's enunciation of the doctrine, the facts of the particular case under consideration do or do not justify the invocation of the doctrine, always remembering that the doctrine is not lightly to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains."

Lord Fraser of Tullybelton, Lord Russell of Killowen and Lord Keith of Kinkel each agreed with both Lord Diplock and Lord Roskill. Thus for the United Kingdom the problem of formulating the proper test for the application of the doctrine of frustration has been laid at rest.

There is one further comment to be made on the judgment of Stephen J. in the Brisbane City Council Case. He quoted from Lord Radcliffe the following passage:

"... it is not hardship or inconvenience or material loss itself which calls the principle of frustration into play. There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for",

and after further comment, said:

"His Lordship's emphasis upon change in obligation is, I think, to be understood in the context of the factual situation under discussion in the Davis Contractors Case" (1979) 145 CLR, at p 161. I do not take his Honour to use the expression "change in obligation" in a sense different from that in which Lord Radcliffe used the expression "change in the significance of the obligation."

It was in my opinion that formulation which led his Lordship to say (1956) AC, at p 729:

"There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for."

That formulation necessarily involves questions of degree.

We are of course not bound by the decisions of the House of Lords but the decisions in Davis Contractors, National Carriers [1981] AC 675 and Pioneer Shipping [1982] AC 724 provide valuable guidance on the present topic. The fact that their Lordships have now firmly adopted a basis for the application of the doctrine of frustration which departs from that adopted in earlier decisions of the House of Lords and from the manner in which the doctrine was expressed in this Court by Latham C.J. in Scanlan's New Neon Ltd. v. Tooheys Ltd. (1943) 67 CLR 169 presents no reason why we should not now apply the doctrine adopted by their Lordships in those cases if we think that it is right.

For my own part I would with respect adopt the reasons of the House of Lords in those three cases as being preferable to the other bases which have been suggested from time to time. Their test has the advantage of being flexible and capable of application to a wide range of circumstances and lacks the degree of unreality involved in the implied term theory. I would, like Stephen J. in the Brisbane City Council Case (1979) 145 CLR 143 , prefer to express my conclusion in the present case on the basis of Lord Radcliffe's formulation.

Having applied that test I am satisfied that the contract between the Authority and the Contractor was frustrated by the grant of the injunction prohibiting work on the tunnels between the hours of 10 p.m. and 6 a.m.

Normally the parties to a contract proceed upon the assumption, usually implicit rather than explicit, that the contract works can be lawfully completed within the period provided by the contract or made appropriate by the nature and extent of the work to be done , or, if one prefers it, within a reasonable time. The possibility that such completion might become unlawful, in the sense that it became impossible for the amount of work to be done in the time required by the contract by the use of normal methods and in lawful working time, was not present to the minds of the parties to this contract. It may be that in other circumstances the parties might have made some express provision for possible legal action, especially in the light of the location of the site in a heavily populated residential area, or at least taken it into account in arriving at or considering the tender price. The erroneous belief entertained by the Authority and communicated to and accepted by the Contractor clearly led to that possibility not being contemplated by either party.

It is plain on the findings of the Arbitrator that both parties proceeded upon the assumption that the works could be lawfully completed within the specified time by continuous work on a three-shift basis for six days a week. The situation became one in which it was impossible to perform the contract in accordance with its terms, impossible because court orders restrained the mode of performance, which was held to constitute a nuisance, but which was critical to the completion of the works within the time allowed.

It is a different situation from that in which one party has been prevented from completing the contract work within the specified time because of shortage of labour or shortage of materials, or both. Those cases are not cases in which the completion of the work in the contract period is rendered impossible because injunctions have prevented the work being done in a manner and at times which, from the outset, both parties knew were essential to completion on time.

This situation does not appear to be the subject of any decided cases. It bears a superficial resemblance to two of the "Suez Canal cases" but an examination of those cases shows that they are significantly different. The first was Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H. [1962] AC 93 . In that case there was a contract by which the sellers agreed to sell to buyers Sudanese ground nuts for shipment c.i.f. Hamburg during November/December 1956. On 2 November the Suez Canal was closed but the goods could have been shipped round the Cape of Good Hope. That route was more than twice as long and much more expensive. The sellers did not ship the goods. In arbitration proceedings the sellers were held to be in default. It was held that there was no implied term that shipment was to be by Suez or by the customary route at the date of the contract and the sellers' obligation was to ship the goods to their destination by a reasonable and practicable route if available. It was also said that although the route via the Cape involved a change in the method of performance, it was not such a fundamental change as to bring about frustration. An important feature of the case however is that there was no evidence that the buyers attached any importance to the route, i.e. there was no time fixed by which delivery was required to be made and the longer journey round the Cape, though more expensive, would not involve any failure to deliver in accordance with the contract. To the same effect was The Eugenia [1964] 2 QB 226 where the blocking of the Suez Canal was held not to bring about "so fundamentally different a situation" as to frustrate a charter party. Lord Denning M.R. (1964) 2 QB, at p 239 said that the parties foresaw the possibility that the canal might be closed but were unable to agree on what provision should be made for it. He said that it was therefore possible to argue for frustration as the parties had made no provision for the event which happened. Lord Denning referred to the fact that there was no special reason for early arrival and the only effect was that the voyage was longer and more expensive. Donovan L.J. also referred to the negotiations between the parties, saying that they had considered the contingency of the canal being closed but, although suggestion had been made for a clause to deal with that question, the parties were unable to agree on what the provision should be. Donovan L.J. also drew attention to the fact that there was no evidence that early arrival of the cargo was of particular importance. Danckwerts L.J. agreed with both judgments.

The fact that there was no time fixed for completion of the voyage in each case is an important part of the reasoning and provides a significant difference between those cases and the present case.

It is also significant to note that in The Eugenia both Lord Denning M.R. and Donovan L.J. referred to the negotiations between parties which led up to the contract. That was treated, without the need for express comment, as part of the surrounding circumstances to be taken into account.

However in the present case the Contractor was obliged to complete the work within a specified time, subject only to extensions required to be granted by the Authority or its Engineer in accordance with the terms of the contract. The Arbitrator took the view that more than a mere extension of the time for doing the work was involved. He found that the whole programme of the work was disrupted and would have had to be restructured. The Contractor then had an apparently absolute obligation (subject to questions of extension of time in accordance with other provisions of the contract) to complete the works by the original contract date in a situation in which it was impossible for that obligation to be performed lawfully.

In my opinion the grant of the injunction produced frustration in the true sense of that term. It had become unlawful to perform the work in a manner which would have complied with the requirement of the contract, a requirement well known to both parties. The fact that both parties to the contract had an understanding of the law which led them to believe that the performance of the contract on the three-shift basis could not be interfered with by any private or public litigant seeking to restrain a nuisance caused by the performance of the work, does not prevent the application of the doctrine of frustration.

The situation presents a close analogy with the requisition of a ship or the issuing of restraining orders under war-time regulations which prevent the construction of a dam, rather than an analogy to the Suez Canal Cases.

We are not in exactly the position of Lord Radcliffe in Davis Contractors [1956] AC 696 , nor in the same position as Lord Roskill in Pioneer Shipping. In each case their Lordships regarded the conclusion reached by the Arbitrator as not capable of being challenged. Lord Roskill (1982) AC, at p 752 said:

"The required informed judgment must be that of the tribunal of fact to whom the issue has been referred. That tribunal, properly informed as to the relevant law, must form its own view of the effect of that delay and answer the critical question accordingly. Your Lordships' House in Tsakiroglou & Co. Ltd. v. Noblee Thorl G.m.b.H. [1962] AC 93 decided that while in the ultimate analysis whether a contract was frustrated was a question of law, yet as Lord Radcliffe said at p. 124 in relation to that case 'that conclusion is almost completely determined by what is ascertained as to mercantile usage and the understanding of mercantile men.'"

We have however the benefit of the facts as found by the Arbitrator and the conclusions reached by Ash J. on those findings, most if not all of which are relevant to the question of frustration as well as to an implied term.

Clause G.28 - Rise and Fall Clause

There were in dispute between the parties a number of items relating to the operation of the "rise and fall clause". In the course of argument some were abandoned, leaving only the major question whether the "value of the uncompleted portion of the contract" was subject to the clause and the position as to "sick leave", "accident make-up pay" and "shift allowances". On the view which I have taken on the question of frustration, there is very little scope for the operation of this clause but it is, in the circumstances, desirable that I should express my view on its meaning and operation. It may affect the amount payable on a quantum meruit basis in respect of work done after frustration occurred. The rise and fall clause was as follows:

"CHANGES IN WAGE RATES AND HOURS OF WORK

(1)

If after the date of closing of the Tenders the cost of the Contractor of executing the works at the aforesaid date would be varied by reason of a direct and binding obligation upon the Contractor under any Act of Parliament of the Commonwealth or of a State, or any regulation under any Act, or any award, judgment, determination, order or rule of any competent Court, Board, Commission or other statutory tribunal prescribed for general application by any calling or callings throughout the industry covered by the said award, judgment, determination, order or rule and is not limited to work being carried out in pursuance of the City and Suburban Railways (Amendment) Act 1967, causing a change in:

(a)

the minimum rate of wages prescribed to be paid to persons employed on the site by the Contractor for work under the Contract, or

(b)

the hours of labour to be worked by those persons, or

(c)

the conditions of employment of those persons , the Contract Price shall be varied by the application of the formula provided in subclause (3).

(2)

Excepting as provided in subclause (1) of this clause if after the date of closing of the Tenders the cost to the Contractor of executing the works at the aforesaid date would be varied by reason of a direct and binding obligation upon the Contractor under any award, judgment, determination, order or rule of any competent Court, Board, Commission or other Statutory tribunal causing a change in:

(a)

the minimum rate of wages prescribed to be paid to persons employed in the Commonwealth by the Contractor for work under the Contract, or

(b)

the hours of labour to be worked by those persons, or

(c)

the conditions of employment of those persons, the Contract Price shall be varied to the extent only of seventy-five per cent of the amount calculated by the application of the formula provided in subclause (3).

(3)

For each one cent increase or decrease in the average weekly wage (as hereinafter defined), or alteration in marginal rates of pay, or the equivalent variation due to alteration of standard working hours, there shall be charged against or allowed to the Department's account as the case may be a sum representing 0.008 per cent of the value of the uncompleted portion of the Contract as at the date of any such variation. For the purpose of this clause the expression 'Average Weekly Wage' shall mean the ordinary hourly rate of pay payable under each award converted to 40 hours per week. The average of the weekly wage shall be calculated from the proportioned list of trades shown below and this average shall be deemed to be the weekly wage on which variations are solely computed.

General Construction and Maintenance, Civil & Mechanical Engineering etc. (State) Award.

Tunnel Miner 45%

Cement Gun Operator - Wet - Underground 25%

General Labourer Grade 1 10%

Engineering Construction on Site (State) Award

Fitters 5%

Carpenters, Joiners, Bricklayers Construction (State) Award

Carpenters 10%

Transport Industries (State) Award

Driver 24 ton 5%

The value of the uncompleted portion of the Contract shall not include the whole or any part of any amounts included in the Tender Price in respect of contingency sums, monetary sums, prime cost items and sums and provisional sums. The value of the uncompleted work shall be determined from time to time by the Engineer.

(4)

For purposes of this clause minimum rates of wages shall include all allowances prescribed by any of the relevant awards.

(5)

If after the date of closing of the Tenders the cost to the Contractor of executing the works at the aforesaid date would be varied by reason of any change in the payments payable by the Contractor which are computed or levied on wages of persons including but not necessarily limited to Workers' Compensation Insurance Premium and Payroll Tax, and the change is caused by a direct and binding obligation upon the Contractor under any Act of Parliament of the Commonwealth or of a State, the Contract Price shall be varied by the application of the following formula. For each change of 1 per cent in the rate of Pay Roll Tax or Workers' Compensation Insurance the Contract Price shall be varied by a sum representing 0.4 per cent of the value of the uncompleted portion of the Contract as at the date of any such change.

(6)

The Contractor shall when required by the Commissioner, produce for inspection by the Engineer original policies, cover notes, correspondence, receipts and other documents and records relating to the securing of Workers' Compensation Insurance and shall permit the Engineer to inspect the books and other records and to make such enquiries of the Contractor of his employees as the Engineer thinks fit. If required by the Commissioner, the Contractor shall make a statutory declaration as to the correctness of all information produced by him. Any information obtained by the Commissioner in accordance with the provisions of this clause shall be confidential and used only for the purposes of the Contract.

(7)

Variations will not be made for increases occurring after the date of completion of the Contract, as adjusted by authorised variations, unless approved in writing by the Commissioner."

There is an initial problem of construction in that cl. G.28(1) appears to provide that where there is a change in the minimum rate of wages (as defined), in the hours of work or in the conditions of employment of the workers there referred to, then the entitlement to variation of the contract price is to be calculated by reference to a formula which is set out in cl. G.28(3) but which on its face appears to be directed to a narrower and different topic.

Clause G.28(3) provides for a formula which uses the ordinary hourly rate specified in the awards referred to for six different categories of workers, not necessarily those working on the site or employed elsewhere in Australia on the project. The Court of Appeal took the view that there must be two factors operating before a change can arise under cl. G.28(3). There must be a variation in accordance with the requirements of cl. G.28(1), including changes produced by cl. G.28(4), or of the requirements of cl. G.28(2), and secondly there must be an increase which arises under the formula in cl. G.28(3). I agree with that construction, but there are other questions which arise under this clause.

Sub-clause (3) contains the "formula". It operates first on increases or decreases on three items - (1) the average weekly wage, (2) alteration in marginal rates of pay, (3) equivalent variation due to alteration of standard working hours in the awards and in respect of the trades specified. In such cases there is to be a calculation of 0.008 per cent of the "value of the uncompleted portion of the contract as at the date of such variation". The term "average weekly wage" is defined to mean "the ordinary hourly rate of pay" payable under each of the awards specified, converted to 40 hours per week. It then provides that "the average of the weekly wage shall be calculated from the proportionate list of trades shown below and this average shall be deemed to be the weekly wage on which variations are solely computed". It is then provided that the value of the uncompleted portion of the contract is not to include certain items such as prime cost items. Sub-clause (5) contained a special provision dealing with changes in the rates of payroll tax and workers' compensation insurance upon which nothing currently turns.

Some assistance in the application of these clauses may be obtained from the definition of the expression "contract price" which is set out in cl. G.26(1) which is as follows:

"Subject to the terms of the Contract, the price payable by the Commissioner for the works shall be an amount calculated at the respective unit prices set out in the Schedule of Rates for the quantities of the respective items of work actually performed under and in accordance with the provisions of the Contract, together with the lump sum amounts shown in the said Schedule for the items of work to which they are applicable actually performed under and in accordance with the provisions of the Contract."

It should be added that the expression "value of the uncompleted portion of the contract" (the "VUPC") was not defined, nor was any means of ascertaining it expressly specified. It may however properly be assumed that it bears the same meaning as the expression "the value of the uncompleted work" used in cl. G.28(3). It may also be assumed that, as this is a "schedule of rates contract", the VUPC will be calculated by ascertaining the remaining amount of work to be completed under each of the scheduled items, and at the scheduled rates, leaving aside for the moment the question of rise and fall of the scheduled rates. It would also include any of the fixed cost items not yet supplied.

It is also important to bear in mind that cl. G.28(1) is concerned both with increases and decreases in the average weekly wage or in the minimum rate of labour or conditions. It follows that a decision in relation to the operation of the clause must be considered in the light of possible increases and possible decreases in the value of the VUPC. If one considers the application of the clause in the case of both increases and decreases in cost it will be seen that it operates favourably to the Contractor where there are increases but favourably to the Authority where there are decreases.

I see no reason why this should not represent the contractual intention, however unlikely it may have appeared at the date of the contract that reductions in wages would occur. In the end it is a matter of construction of the words used, not to be influenced by the financial consequences of the factual situation which has arisen. The clause is on its face directed to both sets of circumstances and the fact that in one case it may act favourably to one party and in the converse case favourably to the other provides no basis for departing from the ordinary meaning of the words used. It is difficult to see to what the expression "value of the uncompleted portion of the contract" can refer other than that which would be paid to the Contractor if he were then and there to complete all the outstanding work. If that is its meaning it is quite plain that it would have to be calculated at the actual rates then current (including the increase in question) and that what the Contractor would have to pay for the completion of the work on that hypothesis would be the wage rates then prevailing, i.e. the wage rates which were the cumulative result of a series of previous increases. There would be no other means of calculating the value of the uncompleted work, for future changes in wages or other variable items in the calculation would be incapable of prediction. The expectation in this particular instance would be that the figure would continue to rise, i.e. to rise proportionately in respect of each item of uncompleted work from time to time. In my opinion the operation of the clause requires that the rates must be "updated" on each occasion by the operation of the rise and fall clause, increases being cumulative. This will result in the VUPC being updated as to the content of the uncompleted work by an appropriate allowance for that which has been completed since the previous calculation and equally updated by the change in the rates, i.e. the reduction of the value by the amount of the "value of the newly-completed work" and increased by the operation of the increase in the rates applicable to the work still to be done. Thus this calculation will be reflected in the "amount to be debited to the Department's account" under cl. G.28(3). In my opinion the various calculations that have been put forward do not assist in the construction of the clause.

I note that the Court of Appeal stated that "the decreases theoretically postulated by the clause were omitted from any exposition of its possible meaning" but I regard that as a matter relevant to the proper construction of the clause. I should however add a reference to the definition of the term "contract price" in cl. G.26(1) which distinguishes between the price payable by the Authority and the Contractor's tender price. I agree that the contract price payable as defined in cl. G.26(1) relates to quantities of specified kinds of work actually performed and in that respect it differs from the price tendered which is calculated by reference to estimated quantities of work. I note that in the Court of Appeal it was said that the tender price contains none of the amounts referred to in the penultimate sentence of cl. G.28(3) but that seems to do no more than indicate the use of the Authority's standard form in a case to which that particular clause has no application. This is not an uncommon occurrence in the case of the use of an elaborate standard from such as the present form, though it sometimes causes problems of construction because of the interaction of one clause with another.

Clauses of this general kind are to be found in the reports concerning other construction contracts. Thus there was a similar clause in the contract considered in Lewis Construction (Engineering) Pty. Ltd. v. Southern Electric Authority of Queensland (1976) 50 ALJR 769 but in that case there was no dispute as to the operation of the clause and it was not referred to in the judgment of the court. In T.C. Whittle Pty. Ltd. v. T. & G. Mutual Life Society (1977) 52 ALJR 173 the rise and fall clause required a percentage calculation based on the uncompleted portion of the contract but the clause itself directed that that value should not include certain specified items or "previous rise and fall adjustments". In Max Cooper and Sons Pty. Ltd. v. Sydney City Council (1980) 54 ALJR 234 there was an express provision that the value of the uncompleted portion of the contract was not to include any sum for which a separate rise and fall clause was included. But that would not necessarily produce the result sought by the Authority in the present case because the phrase differs from that in either of the previous cases. These cases are of no direct significance beyond demonstrating that it is a question to which contractors and building owners engaged in large projects have directed their minds in some instances so as to exclude rise and fall of the VUPC, a course which the Authority, whose document this is, did not see fit to take in the present case. If the construction were doubtful the provision should be construed contra proferentum.

I agree with the Court of Appeal's observation that:

"There is in our belief no reason for excluding from the VUPC escalations previously awarded under G.28(3) which relate to unperformed work. Such a construction creates no disharmony when considered together with clauses G.14, G.15, G.21, G.26 and G.31. It reflects an intention which the words of the clause considered in their context most readily yield. It is an intention consistent with the business appreciation of both parties that the value of the outstanding work is that sum which the contractor is entitled to receive for performing it and the principal who provides for having it performed."

and I would add to the final sentence in that quotation the words "calculated as at each occasion when the rise and fall clause is to be applied".

It is necessary also to refer to the argument in which it was said for the Authority that this basis of calculation involved an absurdity. This argument involved the proposition that the VUPC had to be determined on the very day of the variation and therefore it was necessary to have regard to costs as escalated by the variation taking place on that very day and that this required an infinite regress of diminishing adjustments. Even if this does not involve the fallacy of the hare and the tortoise it departs from common sense. It seems to be clear enough that the calculation is to be made upon the operative date of the variation based upon the amount of the work outstanding as at the end of the previous day.

The next question relating to cl. G.28 is the determination of the kinds of variation to which the formula applies and those to which it does not apply. There were originally seven items in dispute and the Arbitrator raised in his case stated a question whether any and which of them were to be taken into account. The Authority appealed against four items and the Contractor against the decision as to the remaining three items. However in this Court there remained only two items in dispute. I should add that no question arises as to shift allowances because they are not provided for in the awards by reference to which the calculation is to be made.

The formula in sub-cl. (3) which is brought into operation by sub-cl. (1) is not directly related to the factors in sub-cl. (1) itself. The latter operate only as a "trigger". What sub-cl. (3) requires is a calculation related to the "average weekly wage" as defined, or an "alteration in marginal rates of pay" or "standard working hours". That list of items is not necessarily identical with sub-pars (a), (b) and (c) of sub-cl. (1) although there is some overlap. The actual alteration triggered by the occurrence of any of the events referred to in sub-cl. (1) requires an examination first of all of the "average weekly wage". The term "average weekly wage" is defined and is to be ascertained by a wholly artificial calculation set out in sub-cl. (3). The allowances made by "charging against or allowing to" the Authority's account (i.e. the increase or decrease in the amount to be paid for the outstanding work) are not related to the increases referred to in sub-cl. (1); they are merely occasioned by the events referred to in sub-cl. (1). What is then to be calculated is the alteration in the average weekly wage as defined (or alteration in marginal rates or standard working hours as established by the formula) which relates only to average weekly wages and not to the other factors which may bring about the increase. In the "definition" of "average weekly wage" the expression "each award" must be taken to mean the awards referred to in sub-cl. (3).

For ascertaining the "average weekly wage", the artificial calculation set out in sub-cl. (3) is the only calculation to be used and at that stage the operation of the formula departs from the events which trigger its operation. It does not seem to me that the clause is unworkable and when it is remembered that the clause is intended to provide for increases in the cost of materials as well as wages, though not triggered by movements in the cost of materials, the somewhat arbitrary nature of the calculation bears a less surprising appearance.

The definition of "minimum rates of wages" in sub-cl. (4) appears to me to operate only for the purposes of sub-cl. (1) and to expand the notion of, or more precisely to define, the "triggering event" and "the relevant awards". It must mean those which cause the changes referred to in sub-cl. (1) and not those listed in sub-cl. (3).

I return now to the question whether the remaining two items in dispute require adjustment under this clause. In my opinion the short answer in relation to each of those items is that, if they are included in the weekly payments required to be made under one or more of the awards referred to in cl. G.28(3), they must be included as part of the "ordinary hourly rate of pay payable under each award". They should also be included in the "minimum rate of wages prescribed" within the meaning of sub-cl. (1)(a) so as to operate the "trigger". If it is borne in mind that cl. G.28(1) is only a triggering mechanism and that cl. G.28(3) prescribes the calculation to be made when a trigger is pulled, most of the problems of construction disappear and the application of the clause to the remaining specific items in dispute is rendered somewhat easier. The application of sub-cl. (3) to these items will depend entirely upon the terms of the four awards, the provisions of which enter into the calculation required under sub-cl. (3). If any of these amounts or categories of allowance are prescribed in those awards then these items will necessarily enter into the calculation because they all contribute to what may properly be described as the "wage" or the "weekly wage" as calculated from the "ordinary hourly rate of pay". If those awards provide for hourly rate which includes a figure in respect of either of those items, then they are to be taken into account. If those awards do not contain an "ordinary hourly rate", as distinct from marginal or supplementary payments, then there would be no reason for excluding any of the amounts which are paid in respect of a 40-hour week from being included. In the end this will be a matter for the Arbitrator to deal with in respect of the period up to the occurrence of the frustrating event in the light of the precise terms of those awards, if the parties are unable to agree. It may become a factor for consideration in the post-frustration period in the calculation on a quantum meruit basis.

Jurisdiction of Arbitrator in relation to Frustration

Although the question was not the subject of an appeal (if one were available) from the decision of Yeldham J. in the Supreme Court, or argued before us, I am of opinion that we should now decide whether in Australia the decision of the Privy Council in Hirji Mulji v. Cheong Yue Steamship Co. [1926] AC 497 should still be followed in preference to the later decision of the House of Lords in Heyman v. Darwins Ltd. [1942] AC 356 . In the resolution of that conflict I agree with the view expressed by Mason J. in his reasons for judgment that the latter case should be followed in Australia and should be applied by this Court in the resolution of the matters in dispute in this appeal. This will require that the question must be remitted to the Arbitrator for decision. Its resolution by him should not involve significant delay.

I should add that I agree with Mason J. that it is unnecessary to decide the question whether the Arbitrator's findings on the issue of implied term operate as an issue estoppel on the question of frustration.

Interest

The next question which arises concerns the jurisdiction of an arbitrator to award interest in an arbitration under a Scott v. Avery clause. I am in agreement with the views which Mason J. has expressed on this question in his reasons for judgment. I also agree with Mason J. that the Arbitrator had no jurisdiction to award compound interest, or "interest on interest" if that term be preferred.

In the result I would allow the appeal in part and allow the cross-appeal in part. The respects in which I would allow the appeal and the cross-appeal and the manner in which I would deal with costs appear from the order of the Court.