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Supreme Court of Papua New Guinea |
PAPUA NEW GUINEA
[IN THE SUPREME COURT OF JUSTICE]
SCA 41 & 42 OF 2021
BETWEEN:
REDCOCO PROPERTIES LIMITED
Appellant
AND:
JOHN GIMISEVE IN HIS CAPACITY AS THE CHAIRMAN OF THE EHP
SUPPLIES AND TENDERS BOARD
First Respondent
AND:
BENSON IMARA IN HIS CAPACITY AS THE DISTRICT ADMINISTRATOR OF THE GOROKA DISTRICT AND CHIEF EXECUTIVE OFFICER OF THE GOROKA DISTRICT
DEVELOPMENT AUTHORITY
Second Respondent
AND:
ENOCH MIEH IN HIS CAPACITY AS THE CHAIRMAN OF THE BOARD OF GOVERNORS OF THE GOROKA SECONDARY SCHOOL
Third Respondent
AND:
LESTER MITIGEI IN HIS CAPACITY AS THE DEPUTY PRINCIPAL OF
GOROKA SECONDARY SCHOOL
Fourth Respondent
AND:
GOROKA SECONDARY SCHOOL
Fifth Respondent
Waigani: Kassman, Logan, Polume-Kiele
2022: 22nd August
2023: 23rd February
CONTRACTS – construction contracts – meaning of “lump sum” contract – where parties stipulate that contract to be a lump sum contract – where parties also stipulate process for making progress claims and progress payments – held: where parties include contractual stipulations for progress claims and payments, the parties will be taken to have intended that the contract price will be fixed, albeit paid by instalments
EQUITY – restitution – recovery of funds paid pursuant to illegal or unenforceable contracts – where building contract entered into with public body subject to Public Finance (Management) Act 1995 – where contract did not comply with requirements for public tender or approval by Minister – where public body sought restitution of funds paid pursuant to unlawful contract for incomplete works – whether parties are “in pari delicto” – public body entitled to recover funds
COSTS – appeal from indemnity costs order – where National Court awarded costs on an indemnity basis – where costs ordered differentiated between respondents – where National Court did not explain reasons justifying award of indemnity costs or differentiation between respondents – where proceeding brought by unsuccessful party grounded in a mistaken understanding of law did not justify an award of indemnity costs – indemnity costs order set aside
Facts:
On an unspecified date in 2013, Red Coco Properties Limited (Red Coco) entered into a contract with various public bodies and the Goroka Secondary School (School) for the construction of additional school buildings, toilets and staff accommodation at the School (Contract). The Contract was subject to the terms of the Public Finance (Management) Act 1995, which materially required public tender and approval by the relevant Minister. These provisions were not complied with. The Contract was accordingly unlawful.
The material terms of the Contract included:
The parties did not conduct themselves in accordance with the terms of the Contract. Between 12 March and 16 December 2014, K3,799,344 had been paid to Red Coco by various public bodies connected with the School. Despite all but K40,490 of the contract price being paid, Red Coco had not completed all of the buildings stipulated in the Contract. Of the buildings that had been completed – and certificates of practical completion issued – Red Coco had retained the keys such that the School was unable to use them.
In March 2019, a further K1,000,000 was paid to Red Coco by the School, purportedly pursuant to a renegotiation of the Contract.
Red Coco commenced proceedings in the National Court alleging that certain amounts remained unpaid to it under the Contract. The respondents brought a crossclaim against Red Coco, seeking to recoup amounts said to have been overpaid to Red Coco. The National Court dismissed Red Coco’s claim and ordered Red Coco repay the respondent’s K1,598,460 purportedly paid pursuant to the March 2019 renegotiation and K833,605 of overpayments under the Contract.
Red Coco appealed from that judgment.
Held:
Cases Cited:
Papua New Guinea Cases:
PDC Constructions (NG) Pty Ltd v Commonwealth of Australia [1969] PGSC 66
Putput Logging v Ambalis [1992] PNGLR 159; N1094
Teine v University of Goroka [2019] PGSC 108; SC1881
Overseas Cases
Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498
Legislation Cited:
Papua New Guinea Legislation
Fairness of Transactions Act 1993
National Court Rules 1983
Public Finance (Management) Act 1995
Counsel:
Mr. S Gor, for the Appellant
Mr. R Yombou, for the First, Third, Fourth and Fifth Respondents
Mr. B Nahupa, for the Second Respondent
23rd February, 2023
the Contract and not for the construction of a staff duplex in circumstances where:
a. K1,598,460; and b K218,505
The evidence of parties showed, from 11 March 2013 to 5 September 2013 the School made five payments to the Appellant totalling K999,344
From 2 October 2013 to 5 November 2013 the GDA made seven payments to the Appellant totalling K2,100,000.
From 12 March 2014 to 16 December 2014 the GDA made five payments to the Appellant totalling K700,000.
The Public Finance (Management) Act 1995
Finance (Management) Act 1995 (PFM Act), as they stood in 2013, be set out: 59. CONTRACTS FOR WORKS AND SERVICES.
(1) Subject to Subsection (2), tenders shall be publicly invited and contracts taken by a public body to which this Act applies for all works, supplies
and services the estimated cost of which exceeds such sum as is specified in its constituent law or declared by the Minister.
(2) Subsection (1) does not apply to any works, supplies and services–
- (a) that are to be executed, furnished or performed by the State, or an arm, agent or instrumentality of the State approved by the Minister for the purposes of this subsection; or
- (b) in respect of which the public body certifies that the inviting of tenders is impracticable or inexpedient.
61. APPROVAL REQUIRED FOR CERTAIN CONTRACTS.
(1) The provisions of this section apply to and in respect of all public bodies notwithstanding any provision to the contrary in any other law and notwithstanding and without regard to any exceptions, limitations, conditions, additions or modifications contained in any other law.
(2) Subject to Subsection (3), a public body shall not, except with the approval of the Minister, enter into a contract involving the payment or receipt of an amount, or of property to a value, (or both) exceeding–
- (a) K100,000.00; or
- (b) in the case of a public body declared by the Head of State, acting on advice, by notice in the National Gazette, to be a public body to which this paragraph applies–K500,000.00.
(3) The provisions of Subsection (2) do not apply to a contract relating to investment by a public body (including a subsidiary corporation) the subject of a declaration under Section 57(3).
Appeal grounds 2, 3, 6, 12 and 13
“the builder to bring the project to practical completion by 10 December 2013 and then the School will pay the lump sum to the plaintiff. Clause 6.8 provides that the builder will remedy defects not noticed at the time of practical completion. Clause 11, subject to exceptions, states a Certificate of Completion is to be evidence of completion.”
His Honour therefore construed “lump sum” to mean a fixed amount to be paid in full upon the practical completion of the building project (see, in particular, [6] and [38] of his Honour’s reasons for judgement).
At common law a “lump sum” contract means an entire contract in which the law will not imply a term for any payment prior to completion (Hudson's Building and Engineering Contracts,9th Edition, pages 150151).
Yet, as in that case, the terms of the Contract, indicate that “lump sum” is not being used by the parties in keeping with its common law meaning. The presence of contractual provision for progress claims and payment, cls 10.2, 10.4 and 10.5 of the General Conditions, and the qualification of “lump sum” by “to be paid progressively” make this clear. Instead, the term “lump sum” is being used in the same sense as Frost J found it was used in PDC Constructions:
These words are intended to make plain that no adjustment to the contract price is to be made if the quantities in the Bill should prove to be incorrect. (See Hudson’s Building & Engineering Contracts, 9th Edition, page 150, and the cases cited on pages 203-205).
16. As used in the sense described in PDC Constructions and in the present case, a “lump sum” contract places on the building contractor the responsibility of calculating the
project cost, including overheads and its profit. In effect, the building contractor assumes the risk of correctly pricing the project
works from the plans. If it transpires that it is possible to complete those works for less than the lump sum specified in the contract,
the building contractor’s profit margin increases; if not, it decreases. As used in this sense, a “lump sum” contract
may be distinguished from what is termed a “cost-plus” contract, in which the owner/client pays all of the costs, be
they fixed, variable or overhead and additional fees and margin to the building contractor.
17. In the sense used in the Contract, there was no necessary inconsistency between the stipulation that it was a “lump
sum” contract and provision for progress payments. To this extent therefore, the construction of the Contract adopted by the
primary judge was incorrect.
18. This error as to the applicability of the progress claim and payment cls (10.2, 10.4 and 10.5) does not have any consequence, because the parties conducted themselves with an almost sublime disregard to these clauses. Instead, between 11 March 2013 and 15 November 2013, the respondents had, as his Honour found, paid Red Coco instalments totalling K3,099,344. Each of these payments was referable to the Contract. It is irrelevant that some were paid directly by the Goroka Secondary School and some from the Goroka District Treasury. By 10 December 2013, Red Coco had not brought the project works to practical completion.
19. Between 12 March 2014 and 16 December 2014, further instalments totalling K700,000 were paid to Red Coco. Thus, by 16 December 2014, the respondents had paid Red Coco a total of K3,799,344 in respect of the project works. There was a separate project in relation to the construction of a duplex. The trial judge was correct to find that this project was not governed by the Contract and that, on the evidence, none of the instalments paid was referable to this separate project.
20. None of these instalments could be described as progress payments in accordance with cls 10.2 and 10.4 of the Contract. But that does not mean they were not paid to or accepted by Red Coco in respect of the project works. The primary judge was correct to find, on the evidence, that this was the basis upon which each of the instalments was paid to Red Coco.
21. All that was left to pay of the lump sum for which Red Coco undertook to bring the works to practical completion was, as the primary judge correctly found, K40,490. Still by the date of trial, Red Coco had not brought the project works to practical completion.
22. The project works for which the Contract provided were:
23. Of these buildings, (a), (b) and (c) had been built by the time of trial. Red Coco retained the keys to these buildings.
24. On the true meaning of “lump sum”, the balance of K40,490 was only ever payable upon the practical completion
of the project works. Red Coco has not to this day brought the project works to practical completion. Even were the Contract not
illegal, it would have no entitlement to be paid the balance.
25. Red Coco’s delay in completing the project works was said to be due to materials cost escalations because of exchange
rate variations between the PNG Kina and the Australian Dollar and delay by the respondents in making progress payments. As already found, the provision in the Contract
for progress claims and payments was just disregarded by the parties with the respondents just choosing to pay, and Red Coco choosing
to accept, a series of instalment payments.
26. Further, although the General Conditions did contain “rise and fall” clauses (cls 10.6 and 10.9), which might otherwise have covered changes in materials costs, this was, as the learned primary judge correctly found, expressly excluded by a special condition in the Contract, cl 15. This provided:
SPECIAL CONDITIONS COST ADJUSTMENT
The moneys payable to the Contractor under this Contract are not subject to adjustment for rise and fall in costs notwithstanding Clauses 10.6 and 10.9 of this contract.
27. Clause 15 reinforces the meaning of “lump sum” as used in the Contract. Given that meaning, as reinforced by cl 15, Red Coco assumed the risk of changes in materials costs by entering into the Contract. In the face of cl 15, Red Coco’s assertion of a contractual entitlement to be paid for the increased cost of materials is and was always specious. Yet, overwhelmingly, on the evidence at trial, it was this specious understanding of its contractual bargain which informed Red Coco’s failure to complete the project works and to seek further payments from the respondents.
Ground 5
28. Red Coco’s evidence at trial included three certificates of completion, each dated 15 November 2015, apparently issued by the Provincial Building Board, attesting to the completion of particular items in the project works:
29. It was common ground that the 4-1 housing units had not been completed.
30. The accuracy of these certifications was challenged by the respondents. They relied on the evidence of an architect and building expert, Mr Stearford Taosi Amevo (termed “Mr Stearford by the learned primary judge and likewise for consistency in this judgement).
31. Mr Stearford had inspected the project works for the purpose of preparing his report. That inspection was hampered by a failure by Red Coco to facilitate his access to the interiors by not making the keys available to him or otherwise making an access arrangement. Even so, Mr Stearford was able to look inside and assess the degree of completion, including whether contractually contemplated furniture had been provided. His inspection then became the subject of a report, which the primary judge described as “impressive”. He was cross-examined on that report.
32. As the primary judge accurately recorded, Mr Stearford’s evidence was that he observed from outside the buildings that the following contractually specified fixed and moveable furniture was not in place (amounts are as per the cost estimate for the Contract):
33. In relation to the toilet block, Mr Stearford’s evidence was that the ceiling had not been completed. A photo in evidence, taken by him, confirmed this.
34. At trial, evidence was led for Red Coco from Mr Ted Sansip. Mr Sansip was engaged as Consultant Project Manager on the Goroka Secondary School Project by Red Coco. He compiled the original Bill of Quantities of the Goroka Secondary School Project in 2012. Mr Sansip is the holder of a Diploma of Building. He had worked on various major building and construction projects around the country. Mr Sansip’s evidence was discounted by the primary judge on the basis that it was really a mathematical extrapolation from this original Bill of Quantities. The trial judge was entitled to do this. It was the trial judge who saw and heard the witnesses called. On appeal, we do not have that advantage. In preferring Mr Stearford, the primary judge did not misuse that advantage. Independence from a party in dispute also offers a logical basis for his Honour's preference. There is no doubt he had the expertise to express opinions about the state of completion of all of the project works. His report is indeed comprehensive.
35. Red Coco also led evidence from an architect, Mr Jelif Hevis (termed Mr Jelif by the primary judge and in this judgement). Mr Jelif’s evidence was that the 4-1 housing was about 60% complete at the end of 2014 (and had since been vandalised). On this subject, Mr Stearford’s evidence was that, as at the end of 2014, the 4-1 housing was about 57% complete. As his Honour found, on this subject, those witnesses were in substantial agreement. However, neither of these bodies of evidence went to the accuracy of the certificates of completion.
36. On the basis of his acceptance of Mr Stearford’s evidence, the primary judge was entitled to conclude that the certificates of completion were not accurate.
Appeal Grounds 4, 7, 8 and 9
37. Specious though it was, Red Coco’s claim to be owed further money under the Contract resulted in further payments to it.
38. In July 2016, K336.000 was paid to it by the National Gaming Control Board (NGCB). Red Coco claimed, via ground 4, that this money went to the improvement of the 4-1 housing part of the project works. But Red Coco was already obliged under the Contract to bring the whole of the project works to completion, including the 4-1 housing, for the lump sum price as specified in that contract.
39. The primary judge made no finding that the sum of K336,000 was paid on behalf of the respondents or any one of them by the NGCB. Ultimately, however, the reasons for judgement of the primary judge reveal that that sum does not feature as a component of any amount ordered to be paid by Red Coco by the orders under appeal. Thus, even if ground 4 had merit, it would lead nowhere.
40. Two further sums were paid to Red Coco. In March 2019, Goroka Secondary School paid it K500,000 on 14 March 2019 and a further K500,000 on 29 March 2019. These payments were sourced in a sum of K2,000,000 from the National Department of Education and paid into the School’s bank account following representations by a then local member of parliament, Mr Henry Ame.
41. These two payments were referable to what purported to be a renegotiation of the Contract in January 2019. On 9 January 2019, having earlier received an invoice from Red Coco in the sum of K1,598,460 for what was said to be monies owing to it under the Contract the Goroka Secondary School made an agreement (the renegotiation agreement) with Red Coco which recited, amongst other things, “F. The District Authority is desirous of ensuring that the outstanding project invoice is settled and the keys to the respective buildings handed over the school. G. The school is not able to raise payment for the equivalent of the monies owed to the builder as the school account is still closed therefore the aforesaid parties agree to settle the payment as follows:”, and then provided:
42. On the true construction of the Contract, as detailed above, none of the respondents, including the school, owed Red Coco anything at that stage. Red Coco was not entitled to any further payment unless and until it completed the entire project (by the stipulated time) and then only to the balance of the contract price.
43. What follows from this is that Red Coco could offer no consideration in relation to the so-called renegotiation of the contract. The learned primary judge observed (at para. 100) of this renegotiation”
The renegotiated agreement is fundamentally flawed as it was without consideration for the contract to be renegotiated where there was no benefit to the School but enrichment for the plaintiff. The payment of money demanded in the renegotiated agreement was not fair nor just nor did the School's representatives obtain competent independent advice.
We respectfully agree with this observation.
44. The learned primary judge noted that, although reference was made in submissions made on behalf of the present respondents to the Fairness of Transactions Act, that statute was not referred to in their pleadings. Having noted this, his Honour stated that this Act was not applicable for reasons given later in his reasons for judgement. Unfortunately, and with respect, those reasons are not later given.
45. It may be that his Honour had in mind the exclusion by paragraph (e) from the definition of “transaction” in s 3 of the Fairness of Transactions Act of “a transaction that is renegotiated and its terms are substantially altered after three years of the date of the original transaction”. Here, the original transaction, that is the contract, was made in 2013. The purported renegotiation occurred more than three years later, in January 2019. On the facts, the exclusion found in this definition was engaged. Thus, although his Honour did not specify a reason for his conclusion that the Fairness of Transactions Act 1993 (Fairness in Transactions Act) was not applicable, that conclusion was, for the reason just given, correct. We add that, had that Act been applicable, it would, having regard to the concept of “fairness” as described in s 4 of that Act, have been very difficult indeed to characterise the purported renegotiation as “fair”. Put bluntly, and to adopt descriptions offered by the primary judge, Red Coco created a myth of a cost blow out entitling it to additional payment.
46. Notwithstanding his conclusion that the Fairness of Transactions Act was not applicable, his Honour nonetheless found that Red Coco was obliged to refund to the respondents the sum of K1,598,460 paid to Red Coco following the “renegotiation”.
47. The reasoning which led the learned primary judge to his conclusion that this sum was recoverable commenced with reference to Teine v University of Goroka [2019] PGSC 108; SC1881 (Teine), in which this Court addressed the circumstances in which monies paid under an illegal contract might be recoverable. One relevant consideration, so the court found, was whether the parties to the contract were in pari delicto (a situation in which the parties are equally at fault). If the parties are equally at fault, monies paid under an illegal contract will not be recoverable.
48. The learned primary judge noted that, in Teine, this Court had referred with approval to the following observation made by Sheehan J in Putput Logging v Ambalis [1992] PNGLR 159; N1094:
“In pari delicto may be translated as describing a situation where the parties are equally at fault. If that is the case, the parties are stuck with their agreement and no rights or obligations can be enforced. But where they are not equally at fault (where there may have been duress, a mistake of fact, or where the duty of observing the law in the field where the contract arose is placed on one rather than the other), that is, where the law is plainly intended for the protection of a class of persons, parties are not in pari delicto and monies can be recovered.”
49. It is tolerably clear from his Honour’s reasons for judgement that his conclusion was that Red Coco and the respondents were not, in relation to the “renegotiation”, in pari delicto. That conclusion was, having regard to what we have stated above concerning that event, well open on the evidence. Indeed, it was unremarkable.
50. That being so, his Honour concluded that the unfairness of the payment of the sum of K1,598,460 paid to Red Coco was such that it was recoverable. His Honour did not, with respect, explore any further than beyond reference to the two cases just noted, the jurisprudential basis upon which that sum was recoverable. But it is to be remembered that this was a case heard and determined at Goroka in the Eastern Highlands, where the library facilities available to a trial judge are limited indeed. But, in the circumstances, the respondents had a restitutionary claim against Red Coco for money had and received by it. Further, the illegality that rendered the contract unenforceable did not deprive them of their right to advance such a claim against Red Coco; contrast Equuscorp Pty Ltd v Haxton (2012) 246 CLR 498. The purposes of the PFM Act, referred to above, were protective of the interests of the State (and those representing the State or a subordinate body politic) in the proper application of public funds. Here, the countenance of a restitutionary claim by the respondents notwithstanding illegality of contract is completely harmonious with the purposes of the PFM Act.
51. The conclusion of the primary judge that the respondents were entitled to recover the sum of K1,598,460 paid to Red Coco was correct.
52. Based on his preference for Mr Stearford’s evidence, the primary judge also found that the respondents were entitled to recover the following further sums from Red Coco:
| Value of furniture | K218,525 |
| Value of work to complete on the 4-1 housing | K655,570 |
| Sub-total | K874,095 |
| Less outstanding at 2014 | K40,490 |
| Total | K833,605 |
53. There is no cross-appeal by the respondents that the primary judge erred in this assessment by allowing Red Coco the benefit of the sum of K40,490, which was only payable to it in the event that it completed the whole of the project works. On the findings made by the primary judge, which were open on the evidence, Red Coco never completed the whole of the project works, only 60% thereof. The cost of completing the value of the works was, in light of the evidence preferred by the primary judge, K655,570, with the cost of furniture which should have been supplied but was not K218,525. Red Coco never had any entitlement to the balance of the contract lump sum, because it never completed the project works. It was not entitled to the credit allowed by the primary judge. However, as there was no cross-appeal, it would be procedurally unfair to do other than act on the basis of the credit allowed to it by the primary judge.
54. In the circumstances, Red Coco has not shown that these additional items in the total sum of K833, 605 allowed by the primary judge by way of damages for breach of contract were not allowable.
55. The awarding of interest on the sums found to be owing by Red Coco was entirely orthodox.
Ground 10
56. Ground 10 challenges the awarding of costs against Red Coco on an indemnity basis. The primary judge noted that such a claim for costs had been made by the respondents. However, the primary judge did not detail why it was that he had decided that the circumstances of the case were such that he should depart from the usual position that costs are awarded on a party and party basis. With respect, it was incumbent upon his Honour to provide such detail in his reasons for judgement. The awarding of costs calls for the exercise of a judicial discretion. The usual way in which that discretion is exercised is that costs follow the event (Order 22, rule 11, National Court Rules 1983) but are taxed on a party and party basis unless otherwise ordered (Order 22, rule 24, National Court Rules 1983).
57. The conduct of Red Coco, in asserting a claim based on a mistaken understanding in law of the contract and of its “renegotiation” did not, in itself, provide a basis for making other than the usual order as to costs.
58. The costs orders made by the primary judge also differentiated as between the present respondents. Once again, the primary judge did not, as with respect he should have, explain that differentiation. However, it seems, inferentially, to have reflected his assessment in relation to issues raised by particular defendants (or groups thereof) and the degree of forensic success or failure. The differentiation operated in favour of Red Coco. We see no reason to disturb that.
59. Ground 10 should therefore, to the extent noted, be upheld.
Disposition
60. What follows from these reasons for judgement is that the appeal should be allowed in part and Orders 9 and 10 made by the National Court should be set aside. In lieu thereof, it should be ordered:
61. Save as aforesaid, the appeal should be dismissed.
62. The point on which Red Coco has succeeded on the appeal is a straightforward one. It has otherwise comprehensively failed. The issues on which it failed were, as these reasons for judgement reveal, the more complicated and consuming of time both in oral submissions and in related written submissions. It would, of course, be possible to allow some percentage discount in respect of costs awarded against Red Coco as on one event it did succeed. The percentage justly so allowed would be so minor (less than 1%) as to be virtually negligible in end result after taxation. In the circumstances, we consider that no discount is warranted.
63. The appropriate further order is therefore that Red Coco pay the respondents’ costs of and incidental to the appeal on a party and party basis, to be taxed if not agreed.
Orders
_________________________________________________________________
Tamutai Lawyers: Lawyers for the Appellants
O’Briens Lawyers: Lawyers for the Respondents
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