Supreme Court Dismisses Contractual Claim, Grants Cross-Claim for Unpaid Invoices

The court dismissed the claimant's claim for damages and awarded the respondent judgment for unpaid invoices, finding the commitment to provide work was limited to the terms of the March 2015 letter.

Supreme Court New South Wales

Medium Neutral Citation: [COMPANY] v [COMPANY] [2019] NSWSC 475 Hearing dates: 25, 26, 27 March; 2 April 2019; further written submissions ending 15 April 2019 Date of orders: 30 April 2019 Decision date: 30 April 2019 Jurisdiction: Equity - Commercial List Before: Parker J Decision:

1. The Plaintiff's claim for damages is dismissed.

2. The Defendant/Cross-Claimant is entitled to judgment against the Plaintiff for the amount of its unpaid invoices. Catchwords: CONTRACTS – construction – partly written and partly oral contracts – plaintiff entered into a head contract with the Commonwealth for the provision of security services at various Commonwealth sites – plaintiff entered into subcontract with the defendant to supply additional security guards for the purpose of carrying out the head contract – where defendant made an oral commitment to provide other security work to the plaintiff on certain terms – scope and nature of commitment.

EQUITY – equitable set-off – whether defendant's claim against the plaintiff for an amount owing for unpaid invoices is impeached by the plaintiff's claim against the defendant for an alleged failure to supply work hours. Cases Cited: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99; [1973] HCA 36 County Securities Pty Limited v Challenger Group Holdings Pty Limited [2008] NSWCA 193 Hawes v Dean [2014] NSWCA 380 J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 Lym International Pty Ltd v Marcolongo (2011) 15 BPR 29,465; [2011] NSWCA 303 Texts Cited: Australian Law Reform Commission, Essentially Yours: The Protection of Human Genetic Information in Australia, (May 2003), chapter 36 Category: Principal judgment Parties: [COMPANY] (Plaintiff) [COMPANY] (Defendant) Representation: Counsel: [redacted] [NAME] (Defendant)

Solicitors: [redacted] [NAME] (Defendant) File Number(s): 2017/301860 Publication restriction: Nil

Judgment 1. [COMPANY] ("[NAME]") and [COMPANY] ("[NAME]") are both in the business of supplying security guards and other security services on a contract basis. These proceedings arise out of commercial arrangements between the two companies under which each was to subcontract the provision of security services to the other. 2. [NAME]'s headquarters are at Wamberal on the NSW Central Coast. Between 2015 and 2017, which is the period of time relevant for the purposes of this judgment, [NAME] had about 120 security guards on its payroll. The security business of [NAME] is much bigger than that of [NAME]. [NAME] employs 7,000 security guards providing security services at sites all over Australia.

3. The impetus for the arrangements between the parties came from the Commonwealth Government's Indigenous Procurement Policy. This provides for preferential treatment, in the allocation of Commonwealth contracts, of what are described as "Indigenous Enterprises". An "Indigenous Enterprise" is defined under the policy as one owned, as to fifty per cent or more, by persons who are "Indigenous".

4. It was common ground before me that [NAME] is an "Indigenous Enterprise" for the purposes of the policy. It is controlled by [NAME], who has Kamilaro heritage.

5. In early 2015, [NAME] became aware of an opportunity to use the Indigenous Procurement Policy to obtain for [NAME] a security services contract which was to be let by the Commonwealth Department of Foreign Affairs and Trade ("[NAME]"). [NAME] lacked the scale and the staff to undertake the contract on its own. [NAME] sought expressions of interest from larger security businesses to "partner" with [NAME] and provide, as subcontractor, the necessary resources to allow [NAME] to take the contract.

6. In response, [NAME] lodged an expression of interest ("EOI") with [NAME]. [NAME] proposed an arrangement under which it would act as subcontractor to [NAME] for the purposes of the contract with [NAME] in return for a commitment to subcontract to [NAME] security work under other contracts of [NAME]. This was attractive to [NAME] and the two companies proceeded accordingly.

7. The letting of the contract with [NAME] proceeded by way of request for quotation ("RFQ"). [NAME]'s response to the RFQ was lodged with [NAME] in August 2015. Tendering staff employed by [NAME] assisted with its preparation. The submission was successful and in September the Commonwealth notified [NAME] that it had been selected as the "preferred respondent". In October, a formal contract for the provision of the [NAME] security services in question was entered into between [NAME] and the Commonwealth. I will refer to this as the "[NAME]".

8. The provision of services under the [NAME] began on 1 December 2015. [NAME] provided security staff and logistical support to [NAME] to enable it to discharge its obligations under the contract. These services were governed by a formal written contract between parties, to which I will refer as the "[NAME]".

9. Pursuant to the commitment [NAME] had made, [NAME] provided to [NAME] approximately 33,000 hours of security work, as subcontractor, under [NAME]' own contracts. Some further opportunities were offered for [NAME] to undertake work, but [NAME] did not take those opportunities up. The commitment was not referred to in the [NAME] and was not the subject of a separate formal contract between the parties.

10. Tensions had arisen in the relationship by 2017. From [NAME] ceased paying [NAME]' invoices under the [NAME]. In [NAME] approached the [NAME] staff working on the [NAME] with a view to employing them directly, and cutting [NAME] out of the [NAME] work. [NAME] said that [NAME] took this approach because he thought that [NAME] was speaking directly to [NAME] and might be trying to cut [NAME] out of the work.

11. It is not necessary for the purposes of this judgment to go into the rights and wrongs of what happened. Under its written contract with [NAME] had the right to terminate the contract on giving thirty days' notice. Notice of termination was given. The notice provided for termination in less than thirty days, but was accepted by [NAME]. [NAME] then terminated all of its subcontracting arrangements with [NAME]. It is now common ground that all aspects of the contractual relationships between the parties came to an end in July 2017.

12. The termination of the contractual relationship left invoices totalling approximately $620,000, which had been issued to [NAME] by [NAME] for services provided as subcontractor under the [NAME], unpaid. Those invoices remain unpaid.

Issues for determination 1. The present proceedings were commenced by [NAME] as plaintiff. [NAME]'s claim is that the commitment by [NAME] involved a contractual obligation on its part, for the duration of [NAME]'s contract with [NAME], to allocate to [NAME] a specified number of hours of work as subcontractor under other contracts held by [NAME]; and that [NAME] has failed to provide that work. 2. [NAME] makes no claim of misrepresentation or estoppel. Its claim is a purely contractual one.

3. As initially pleaded, [NAME]'s claim was that [NAME]' commitment was to provide 68,000 hours of work per annum. At the end of the hearing on 26 March, following some questions which had been raised by the Court, [NAME] raised an amendment to [NAME]'s claim so as to propound alternatives to the 68,000 figure. The application came before me on 2 April. It was opposed by counsel for [NAME] who pointed out (correctly) that the amendment application came at the last minute, after [NAME] had had ample opportunity to propound its case properly. Nevertheless, I permitted the amendment. I did so because I thought that it simply involved alternative constructions of [NAME]' contractual commitment based on evidence which had already been admitted. It is hardly necessary to say, however, that [NAME] will have to pay the costs thrown away by reason of its late amendment.

4. As amended, [NAME]'s case is that [NAME] was required to provide annually: 68,000 hours of work; or, alternatively, the number of hours specified in the [NAME]; or, in the further alternative, the number of hours specified in [NAME]'s response to the RFQ.

5. For its part, [NAME] accepts that it made a commitment to [NAME] which had contractual force. [NAME] contends, however, that the commitment to provide work was not absolute and that it discharged its obligations up to the point when the contractual relationship was terminated. [NAME] also contends that the commitment, on its true construction, lasted only for as long as [NAME] had the benefit of the subcontract for the [NAME] work.

6. When [NAME] began the proceedings, it claimed "specific performance" of [NAME]' alleged commitment to provide the relevant work. That claim would always have been difficult to sustain and was not pressed at the hearing. Instead, [NAME] accepted that the contract had come to an end (on [NAME]'s case, by way of termination for breach on the part of [NAME]) in July 2017. This meant that [NAME]'s claim was one for damages for breach of contract.

7. The case was prepared for trial on the assumption that the Court would deal with all issues, including the assessment of any damages to which [NAME] might be found to be entitled. At the trial there were extensive objections to the evidence on this question. The parties eventually agreed that the assessment of damages should be deferred until after liability issues had been determined, and if necessary would probably be referred out at that stage. Accordingly I made an order for separate determination of the quantum of any damages to which [NAME] might be entitled after the determination of the other issues in the proceedings.

8. One of the key areas of dispute between the parties concerned the type of work which [NAME]' commitment obliged it to provide. As I have mentioned, [NAME] did provide 33,000 or so hours of work to [NAME] before the relationship broke down. But [NAME] contended that an essential part of the commitment was the provision of work which could be done by [NAME]'s indigenous staff in rural and regional parts of the country. The work sub-contracted by [NAME] to [NAME] required the security guards at the relevant site to have security clearances (known as NV1 and NV2). [NAME]'s indigenous staff did not hold security clearances to this level, and as a result they did not benefit from the work provided by [NAME] (although other staff of [NAME] presumably did and [NAME] itself presumably benefited from the "mark up" which it charged on providing those employees services).

9. In the course of the hearing, [NAME] narrowed its case on this point. It contended that [NAME]' commitment was to provide work totalling a specified number of hours which could be performed by security guards who did not hold NV1 or NV2 security clearances. [NAME] accepted that it had not provided the specified number of hours of that type, but maintained that, on a proper construction of the commitment, it had no obligation to do so. Accordingly any contest about breach disappeared.

10. The result is that for the purposes of [NAME]'s claim, the issue to be determined in this judgment is limited to determining what, on its true construction, the scope and terms of the commitment by [NAME] was. 11. [NAME] cross-claimed against [NAME] for the amounts invoiced under the [NAME] which [NAME] has not paid. Although the cross-claim was initially defended by [NAME], at the hearing [NAME] conceded that it is indebted to [NAME] for the amounts claimed. But [NAME] resists the entry of judgment against it at this stage of the proceedings. [NAME]'s contention is that it is entitled to set-off its liability to [NAME] under the [NAME] against the damages claimed from [NAME] for breach of its alleged obligations under the commitment. 12. [NAME] accepts that its claim against [NAME] has not crystallised into a debt, and will not do so unless and until the quantum of damages to which it is entitled is ultimately determined. There is thus no question of any statutory set-off. [NAME] eschewed any contention that it had any entitlement to a set-off under the terms of the subcontract. Counsel relied instead on an equitable set-off.

Summary and analysis of evidence 1. [NAME]'s dealings with [NAME], to the extent relevant in these proceedings, were conducted on its behalf by [NAME] and by [NAME] who was the account manager for [NAME]. [NAME] gave evidence and was cross-examined before me. [NAME], who has apparently since left [NAME], did not give evidence.

2. On the [NAME] side, the dealings were managed by [NAME], a senior executive of [NAME] based in Melbourne. He was assisted by [NAME] (General Manager - NSW/ACT) and [NAME] (ACT Regional Manager). [NAME], who worked in the tendering section of [NAME], assisted with the preparation of the submission for the [NAME]. Later, for the purposes of administering the [NAME] was designated as [NAME]'s contract manager and dealt with [NAME] on [NAME]'s behalf. She remained, however, in her position at [NAME]. 3. [NAME] gave evidence by affidavit for the purpose of the proceedings, dealing mainly with the course of the relationship between [NAME] and [NAME] over the [NAME]. As a result of the refinement of the case at the hearing, much of [NAME]'s evidence ceased to be relevant. Some parts of her affidavit were read and received by the Court, but she was not cross-examined. None of [NAME] or [NAME] gave evidence.

4. The documentary evidence before me began with [NAME]'s invitation for expressions of interest dated 18 February 2015. It stated: [COMPANY] has been invited by a Government Agency to negotiate the contract for the supply of Security Services. [COMPANY] is seeking a partner to fulfil the contract.

1. The terms of the invitation were not in evidence, but [NAME]'s invitation for expressions of interest contained a summary. The contract start date was to be 1 July 2015. It was to last three years with two one-year extension options. It would require the provision of security services for three [NAME] sites. Two were [NAME] buildings in Canberra, one in Barton and one in Canberra City. The other was [NAME]'s Sydney Airport office. Specified numbers of hours per week were required for specified grades of security officer (plus one supervisor and one receptionist). 2. [NAME] responded by an email letter from [NAME] to [NAME] on 21 February. The response consisted of a covering letter and a fifty page formal proposal. The covering letter identified what was described as seven areas where [NAME] could offer particular strengths to [NAME]. One of these was: -Commitment to partnership – through an investment of $50,000 to assist in transition costs, registration as a preferred supplier with [NAME] equal to this commitment and a commitment to partner and support [COMPANY] on other projects. We will also assist [COMPANY] through payment terms that are 7 days later than those negotiated between [COMPANY] and the Department effectively resulting in the service model being cashflow positive to [COMPANY].

1. Section 1 of the proposal dealt with pricing. It set out [NAME]' prices for supplying specified services at each [NAME] site. The calculations were based on approximately 68,200 hours of labour being required annually, at a total annual cost of about $2.59 million (exclusive of GST).

2. Section 9 of the proposal was headed "[COMPANY]". The benefits were summarised in side notes with each being explained in more detail in the main text. Among the benefits identified by [NAME] was that [NAME] would provide $50,000 by way of "funding assistance" at the beginning of the contract (referred to elsewhere in the evidence as "Bump In"). The proposal stated: … should [NAME] be successful we will provide $50,000 of transition assistance funding to [COMPANY] at service commencement, to assist with short term contract startup costs such as travel, accommodation, new hires, legal and accounting fees.

1. A further benefit was: [NAME] will structure the service to be cashflow positive for [COMPANY] by agreeing to payment terms that are 7 days later than those negotiated between the Department and [COMPANY].

1. The commitment which is the subject of these proceedings was identified in a side note as follows: As a preferred supplier [COMPANY] will have access to a minimum of hours equal to this service contract.

1. The corresponding text was: [NAME] and [COMPANY] have already commenced discussions around bolstering the subcontracting arrangement between the two organisations. [COMPANY] and [NAME] be successful in this opportunity [NAME] will appoint [COMPANY] as a [NAME]. This status will allow [COMPANY] to be appointed into current subcontracted works to a value equal in hours to this service conditional on the [NAME] procurement guidelines being met. The [NAME] procurement guidelines establishes four tests which must be met: ● The transfer must meet the commercial viability test – have no impact on the customer relationship ● The transfer must meet the financial viability test – have no impact on the financial performance ● The transfer must meet the enterprise risk test – have no negative impact on the enterprise risk rating ● The transfer must meet the service viability test – demonstrate continuity of service in the service location [NAME] will work with [COMPANY] to assist it in meeting the four procurement tests.

1. A meeting took place to discuss [NAME]' proposal on 26 February. It was attended by [NAME] and [NAME] from [NAME] and by [NAME] and [NAME] for [NAME]. [NAME]'s note of the meeting is in evidence. It states: Genuine Indigenous Benefit - assistance to be provided for travel and Bump In - [NAME] will put together the final proposal if successful - 68K hours at $2.8 million spend – I asked for clarification [NAME] said they will provide us with the same amount they have already spoken to two national clients. I advised that they need to provide the $2.8 million at 68K hours if we put it in the proposal as we will be held accountable. Rob advised that they would provide that. 1. [NAME] gave evidence, which was not contested, that within a few days of 26 February he had a telephone conversation with [NAME] in words to the following effect: [NAME]: Whatever we put into the proposal, [NAME] will have to provide it to us. [NAME] will want to know that the Genuine Indigenous Benefit is being met. The reason for this is because we need to sign this under the IPP [Indigenous Procurement Policy]. It doesn't matter if we describe it as a $2.8 million commitment or a 68,000 hour commitment. Whatever we put in there, [NAME] will have to honour. [NAME]: I have already spoken to 2 national contractors about using [COMPANY] and we will be able to provide the reciprocal hours. [NAME]: Yeah, yeah mate. That sounds great.

1. On 2 [NAME] submitted to [NAME]'s proposal for the security services contract. The proposal was a twenty-nine page document with an appendix which included an evaluation of the EOI responses received by [NAME] and a copy of [NAME]' response. In the executive summary under the heading "Proof of Genuine Indigenous Benefit" the proposal stated: [COMPANY] be successful with the [NAME] will be awarded the work as the secondary subcontractor, [NAME] have committed to:

1. Subcontracting to equal number of hours to this contract. This will not only grow the business of [COMPANY], but as a result this will provide an additional 68,000 hours per annum which can be filled by [NAME] where possible.

2. Committed to recruiting Indigenous employees wherever possible, with a target of 10 per cent of all positions to be filled by Indigenous staff on this contract This is additional to the roles on this contract which are directly employed 1. Section 1 of the proposal dealt with pricing. It set out a "subcontract price" for the security services for each of the sites and added a margin of 7.5%. The subcontract price corresponded with the price quoted by [NAME] in its response to [NAME]' EOI. It was thus based on an assumption of approximately 68,200 hours of labour per annum, although the labour hour figures were not provided in [NAME]'s proposal itself. The total price quoted by [NAME], including its 7.5% margin but excluding GST, was approximately $2.83 million per annum.

2. Section 2 of the proposal was described as a "Value for Money Demonstration". One of the topics addressed was "Proof of Genuine Indigenous Benefit". The side note stated: An additional 68,000 hours per annum which can be filled by [NAME] where possible through areas of most need of Indigenous engagement.

1. The corresponding passage in the text was: [COMPANY] be successful with [NAME] awarded the work as the secondary subcontractor, [NAME] have committed to: ● Subcontracting to equal number of hours to this contract. This will not only grow the business of [COMPANY], but as a result this will provide an additional 68,000 hours per annum which can be filled by [NAME] where possible through areas of most need of Indigenous engagement. Areas of particular interest include Regional NSW, Regional Qld and Regional SA. This will mean that if [NAME] awards the contract to [COMPANY] it will be directly responsible due to the awarding of the [NAME] to generate additional work opportunities to the value of $2.8 Million per annum.

1. As I have already mentioned, the proposal included a copy of [NAME]' EOI response and its calculations, including those underlying an annual total of 68,200 hours of labour per annum.

2. There is no evidence that [NAME] staff were involved in the preparation of this document, or that they ever saw it. [NAME] confirmed in evidence that he and [NAME] prepared the document.

3. On 4 [NAME] sent an email letter to [NAME]. The letter was headed "Variation to EOI Scope". It began: As requested I provide you with the following additional information with regard to your [NAME] opportunity. Should you have any questions please contact me directly on [a mobile phone number]

1. Under the heading "Preferred Supplier Status" the letter stated: [NAME] and [COMPANY] have already commenced discussions around bolstering the subcontracting arrangement between the two organisations. [COMPANY] and [NAME] be successful in this opportunity [NAME] will appoint [COMPANY] as a [NAME]. This status will allow [COMPANY] to be appointed into current subcontracted works to a value equal in hours to this service conditional on the [NAME] procurement guidelines being met. The [NAME] procurement guidelines establishes four tests which must be met:

1. The transfer must meet the commercial viability test - have no impact on the customer relationship 2. The transfer must meet the financial viability test - have no impact on the financial performance 3. The transfer must meet the enterprise risk test - have no negative impact on the enterprise risk rating 4. The transfer must meet the service viability test - demonstrate continuity of service in the service location [NAME] will work with [COMPANY] to assist it in meeting the four procurement tests 1. At the end of the letter was a section on pricing. It set out personnel numbers, hours and rates for each of the three sites which would be the subject of the contract with [NAME]. A number of the positions specified in the EOI were not included, resulting in the labour hours to be provided by [NAME] being reduced. The reduced hours totalled approximately 54,800 per annum.

2. It is clear from the terms of the letter that it was written at [NAME]'s request. The evidence does not directly identify what the precise terms of the request were or what prompted it. But it is clear enough from later events that [NAME] had decided to fill some of the positions under the contract with [NAME] employees and requested [NAME] to re-submit its offer for the balance.

3. The contract with [NAME] was not let for the period from 1 July 2015 onwards as originally foreshadowed. The letting process was only completed in October and the contract ultimately started from 1 December. The evidence did not explain why this delay occurred, or what (if anything) happened between April and July. 4. [NAME]'s proposal was lodged with [NAME] on 7 August. It was referred to in evidence as a "tender" although strictly speaking it was a response to an RFQ. On its face, it was a proposal from [NAME] to [NAME] and went out under [NAME]'s name. The evidence before me showed that [NAME] of [NAME] assisted in its preparation. On 4 [NAME] sent the initial draft of the quotation to [NAME] with a copy to [NAME]. She said: Attached is an initial draft – please bear in mind that the content at this stage has been based on [NAME]'s outline and may still need to be fleshed out in some areas. I have done very minimal proof reading at this stage, and the sidebar (pullout quotes and graphics) needs attention also. Please send through any feedback and guidance, which I will action when I am back in the office on Thursday.

1. On 6 August at 3.34pm [NAME] provided an updated draft to [NAME] and [NAME] for review. At 4.44pm she sent a further email to [NAME] advising: [NAME] is happy with the document, so as per the minor adjustments you mentioned in our last discussion, a completed version is attached for submission. Please let me know if any problems or there's anything else you need.

1. It appears that [NAME] made no changes to the document before submitting it.

2. Section 1 of the proposal contained pricing details. The total price was approximately $2.91 million, excluding GST. The labour requirements appear to have been the same as those specified in the EOI, but were allocated between employees of [NAME] and staff provided by [NAME]. [NAME] was responsible for seventy-six per cent of the staffing.

3. The executive summary contained a section headed "Genuine Indigenous Benefit". This stated: [COMPANY] be successful in being awarded this contract with [NAME] as subcontractor, [NAME] have committed to: ● Subcontracting to equal number of hours to this contract. This will not only grow the business of [COMPANY], but as a result this will provide an additional 68,000 hours per annum which can be filled by [NAME] where possible. … Indigenous staff employed by [COMPANY] will have the opportunity to progress to being able to perform Duties at [NAME]. The subcontract agreement with [NAME] will create a pathway, via various subcontracting opportunities in line with the preferred supplier status for career progression.

1. The corresponding statement in section 5 of the proposal was as follows: [COMPANY] be successful, with [NAME] awarded the work as subcontractor, [NAME] have committed to: ● Subcontracting to equal number of hours to this contract This will not only grow the business of [COMPANY], but as a result this will provide an additional 68,000 hours per annum which can be filled by [NAME] where possible through areas of most need of Indigenous engagement. Areas of particular interest include Regional NSW, Regional Qld and Regional SA. This will mean that if [NAME] awards the contract to [COMPANY] it will be directly responsible due to the awarding of the [NAME] contract to generate additional work opportunities to the value of $2.8 Million per annum.

1. These two passages are in exactly the same terms as the corresponding passages of [NAME]'s March proposal to [NAME]. [NAME], through [NAME], did not contribute to the wording of this part of the proposal. Presumably the wording came from the "outline" which [NAME] provided to [NAME], or the March proposal was provided to [NAME] as a template from which to work.

2. On 21 [NAME] received a letter from [NAME] which stated: Following evaluation of your response to our RFQ for the provision of [NAME], I am pleased to inform you that [COMPANY] has been selected as the preferred respondent. Note that this letter does not constitute an acceptance of your proposal. The award of the contract will be subject to the negotiation of a mutually acceptable contract. I will contact you shortly to arrange a mutually convenient time to commence contract negotiations. In the event that our respective organisations are unable to conclude a mutually acceptable contract, [NAME] reserves the right to terminate the negotiations.

1. On 28 [NAME] wrote to [NAME] attaching a copy of the [NAME] letter. He also attached "a letter advising [COMPANY] has agreed to appoint [NAME] [sic] for 3 + 1 + 1 years". The letter stated: As discussed, [COMPANY] has been successful in gaining the [NAME] contract. I would like to formally advise [COMPANY] has accepted your offer. The terms of the contract will be: Commencement: 1st December 2015 Scope or works: As per scope provide and quoted. Term: 3 years + 1 + 1 We will formally provide a copy of the [NAME] contract by 15.10.2015.

1. A copy of the [NAME] is in evidence before me. It was dated 12 October. The number of staff required at the two [NAME] sites was slightly reduced when compared with the staffing level contemplated by [NAME]'s August proposal. This was reflected in the pricing schedule which provided for fees in the first year of $2.67 million, exclusive of GST.

2. The [NAME] contained no provisions dealing with Indigenous advancement except for clause 68 which provided:

68. INDIGENOUS TRAINING, EMPLOYMENT AND SUPPLIER PLAN 68.1. The Contractor must establish, maintain and report on its performance in implementing its Indigenous Training, Employment and Supplier Plan ('Indigenous Plan') for the Term of the Contract. 68 .2. The implementation of the Indigenous Plan in no way diminishes the Contractor's other obligations under or in connection with the Contract. 68.3. No more than two (2) months after the annual anniversary of the Contractor's Indigenous Plan, the Contractor must provide the Department of Employment with an annual Implementation and Outcomes Report that meets the Implementation and Outcomes Report requirements stipulated in the Indigenous Opportunities Policy Guidelines. … 68.4. The Contractor must apply for re-approval of its Indigenous Plan no less than two (2) months prior to the expiry date of its existing Indigenous Plan, or as otherwise advised by [NAME]. 68.5. Without limiting [NAME] rights, [NAME] may withhold or suspend any payment in whole or in part, if the Contractor has not performed its obligations under this Contract regarding maintenance of a current Indigenous Plan and to reporting to the satisfaction of the Commonwealth.

1. The copy of the [NAME] in evidence has been signed by [NAME] on behalf of [NAME] but has not been signed by [NAME] or dated. It may well have been signed by [NAME] in advance of the [NAME] being formally issued. Nevertheless it is common ground between the parties that it was binding on them.

2. The reduction of hours in the head [NAME] flowed through to the [NAME]. The staffing to be provided by [NAME] under the Subcontract equated to approximately 45,900 hours per year. Clause 22 of the Subcontract relevantly provided: This agreement may be terminated by [COMPANY]: (a) at any time by giving 30 Business Days notice to the Contractor; or (b) without notice if: (1) the Contractor breaches this agreement and, in [COMPANY]'s reasonable opinion, the breach: (A) cannot be remedied; or (B) can be remedied, but the Contractor does not remedy it within 5 Business Days after [COMPANY] gives the Contractor notice of the breach… 1. The [NAME] was confined in its terms to work subcontracted to [NAME] under the [NAME]. It said nothing about [NAME]' commitment to provide other work to [NAME]. It did not contain any terms about Indigenous advancement.

2. The term of the [NAME] was three years commencing in October 2015, with two options to extend for a further 12 months each. The first option was presumably exercised as the Contract remains on foot.

Equitable set-off 1. It is convenient to deal first with [NAME]' cross-claim. There was no debate before me about the principles to apply in determining whether the defence of equitable set-off is made out. [ADDRESS] does not act on some sort of generalised notion of fairness. [NAME] is entitled to proceed to judgment for the amounts owing to it, which are now admitted, unless its entitlement is "impeached" by [NAME]'s claim for damages for breach of contract. There must be something inequitable or unconscientious in [NAME] proceeding to an enforceable judgment while its alleged liability for breach of contract has not been determined: Hawes v Dean [2014] NSWCA 380 at [58]-[82].

2. I was not referred to any authority providing any specific analogy to the facts of this case. Instead, I was invited by both parties to deal with the question as a matter of general principle.

3. In the present case, I think it is clear that the [NAME] granted by [NAME] was connected with the commitment made by [NAME] to provide further work to [NAME] by way of subcontract. The commitment was part of the consideration provided by [NAME] for obtaining the [NAME]. But otherwise the two obligations were distinct. As will be seen, [NAME]'s submission is that [NAME]' commitment operated quite independently of the [NAME]. At most (and this is [NAME]' contention, not [NAME]'s) the number of hours [NAME] was to provide to [NAME] by way of subcontract was limited to the number of hours provided by [NAME] to [NAME] under the [NAME].

4. In particular, there was no relationship between the parties' respective payment entitlements and obligations. Each party was entitled to be paid for doing work and the obligation arose upon the work being done.

5. The parties expressly contemplated that [NAME] would be able to fund its obligations under the [NAME] from the payments it received under the head [NAME]. The payment arrangements were designed to ensure that [NAME] would not be out of pocket in this regard. No further delay in payment to [NAME] for work done under the subcontract was contemplated.

6. If [NAME] succeeds in its claim, it will be entitled to damages based on [NAME]' failure to subcontract security services in accordance with its alleged commitment. But [NAME] has not provided those services and has not incurred any expenses in connection with their provision. [NAME]'s claim is for pure loss of profit. And the simple fact is that [NAME] has had the benefit of the payments under the [NAME] for more than eighteen months, but has withheld payment of the corresponding amount to [NAME] who provided most of the services for which [NAME] has been paid by the Commonwealth.

7. In these circumstances, I do not consider that [NAME]' entitlement under the cross-claim is relevantly impeached by [NAME]'s claim for damages for breach of [NAME]' commitment to provide further work to [NAME] by way of subcontract. [NAME] is entitled to judgment for the amounts of its unpaid invoices under the [NAME] subcontract whether or not [NAME]'s claim for damages for breach of contract is sustained.

[NAME]'s contractual claim 1. [NAME] relied on the version of [NAME]' commitment as recorded in [NAME]'s response to the RFQ in August 2015. The commitment was described as a commitment to subcontract to [NAME] an "equal number of hours to this contract" which would "provide an additional 68,000 hours per annum which can be filled by [NAME] where possible through areas of most need of Indigenous engagement".

2. Counsel contended that in signifying that it was content for the proposal to be provided to [NAME] in this form, [NAME] was effectively agreeing to fulfil a commitment in these terms. Counsel further contended that it was implicit in such a commitment that the hours of work to be provided would be for security officers who did not hold NV1 and NV2 security clearances. This implication was said to arise from the circumstance that [NAME]'s [NAME] did not hold such security clearances.

3. In response, counsel for [NAME] relied on the terms of [NAME]' letter of 4 March 2015, which reflected the terms of [NAME]' earlier proposal in response to [NAME]'s request for EOI. This provided for [NAME] to be allocated subcontract works "to a value equal in hours to this service", but it was conditional on [NAME]' procurement guidelines being met. Counsel also contended that the reference to "this service" was, on its true construction, a reference to the [NAME], not the head contract. Counsel also contended that the procurement guidelines had not been satisfied.

4. As I have stated, both sides accept that there was a commitment having contractual force. The question for the Court is what the terms of that commitment were. Although there was a formal contract which governed the [NAME], the commitment concerning the subcontracting of [NAME]' work to [NAME] was not recorded in a formal contractual instrument. [NAME] emphasised that this meant the parol evidence rule did not apply, and it was open to the Court, in determining the scope and terms of the commitment, to look at all of the prior dealings between the parties, including undertakings and representations made orally and by conduct. This submission was not disputed by counsel for [NAME] and I accept it. The task for the Court is to construe the dealings of the parties, taken as a whole, in order to determine what the commitment was: J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 at 1083.

5. Counsel submitted that for the purposes of this exercise, it was open to take post-contractual conduct into account. Counsel relied on County Securities Pty Limited v Challenger Group Holdings Pty Limited [2008] NSWCA 193 at [162]; Lym International Pty Ltd v Marcolongo [2011] NSWCA 303; 15 BPR 29,465 at [139]-[141]; [143]. But counsel did not suggest that any post-contractual conduct of the parties threw any light on the nature of the commitment.

Accordingly, it is sufficient to have regard to the prior conduct of the parties.

6. There are three main differences between the commitment as it appeared in the [NAME] letter of 4 March and as it was described in the [NAME] proposal on 7 August. The first is that the commitment in the March letter was conditional upon compliance with the [NAME] procurement guidelines whereas no such condition was mentioned in the August proposal. The second is that the August proposal involved Indigenous advancement in the form of providing work to [NAME], but this was not mentioned in the March letter.

7. The third difference is less obvious. The March letter spoke of the commitment as being for hours equal "to this service". [NAME]'s August proposal to [NAME] described the commitment as one for subcontracting to "equal number of hours to this contract". The wording was virtually identical. But there was a significant difference in the context. The subject matter of [NAME]' March letter was the proposed subcontracting of the [NAME] work from [NAME] to [NAME]. In this context, it would be natural to read the reference to "this service" as a reference to the proposed subcontract. But [NAME]'s August proposal was a proposal for the grant of the head contract from [NAME]. In that context, a reference to "this contract" would naturally appear to be a reference to the head contract, not the subcontract to [NAME].

8. In determining what, on true construction of the parties' dealings, the commitment was, I must resolve these differences. To my mind, there are three features of those dealings which are significant for that purpose.

9. The first feature is the place of the March letter in the parties' dealings. The letter followed a meeting at which the terms of the commitment had been discussed. Indeed, on [NAME]' own evidence, the importance of the commitment had been emphasised. Viewed objectively, the letter appears to be an attempt by [NAME] to state formally what commitment it was offering. Although the parol evidence rule does not apply and reference to oral conversations is not excluded, it is only natural in an objective analysis of what the parties agreed for the Court to place great weight on a formal written statement of the terms being offered by one party.

10. It is important that there was no response to the letter. The letter was arguably inconsistent with the terms of the February 2015 negotiations as recollected by [NAME], and with the description of the commitment which appeared in the 2 March submission to [NAME]. On the case now put forward by [NAME], it was definitely inconsistent. But there was no attempt by [NAME], then or later, to resolve any tensions or inconsistencies.

11. In [NAME]'s letter of 28 September, [NAME] stated that it was accepting [NAME]' "offer". In the context, it is natural to read this as a reference back to the March letter, rather than to read it as a reference to some promise made orally at an earlier point of the negotiations, and still less as a reference to some promise arising by implication from [NAME]' conduct concerning the August proposal.

12. The context for the August proposal was quite different. It did not involve direct exchanges of terms between [NAME] and [NAME], but rather the preparation of a document designed to go to a third party, [NAME]. It was not conduct which was directed towards defining the terms of the commitment but rather to describing the terms of the commitment to a third party. Of course [NAME] had an interest in the proposal being successful. But the proposal was not [NAME]' document and [NAME] was accepting no responsibility to [NAME] for its content. 13. [NAME] had mentioned in his discussions with [NAME] representatives in February 2015 that [NAME] would be "accountable" for the commitment. But in fact, it is not clear that the August proposal involved any legal commitment from [NAME] to the Commonwealth. It did not use the language of an immediately acceptable offer, and that is not how it was in fact treated as between the [NAME]. The [NAME] as issued did not impose any obligation with respect to Indigenous advancement on [NAME] in connection with the work to be subcontracted from [NAME]. There is nothing to suggest the parties ever contemplated that it would do so.

14. The second feature which I consider important is the lack of clarity in the language of the August proposal concerning the promotion of Indigenous employment.

15. The term "Indigenous" is not defined in the Indigenous Procurement Policy. [NAME] referred me to a report of the Australian Law Reform Commission (ALRC), styled "Essentially Yours: The Protection of Human Genetic Information in Australia", which (in chapter 36) describes a three-fold test. There was also evidence before me of website extracts from the Australian Institute of Aboriginal and Torres Strait Islander Studies website which suggests that, generally speaking, governments in Australia apply this test in determining that someone is "Indigenous".

16. The first element of the test is a racial one: descent from a person of the Aboriginal or Torres Strait Islander race or races. No minimum level of Aboriginal or Torres Strait Islander ancestry is required in a person of mixed race. But the test does require, as the second and third elements, that the person in question "identifies" as an Aboriginal or Torres Strait Islander and that he or she is accepted as such by his or her Aboriginal or Torres Strait Islander community group. According to [NAME], such groups will issue certificates which certify that a person is so accepted.

17. The second and third elements of the ALRC test involve a degree of self-selection and collective self-perpetuation which may be controversial in particular cases. I do not think that the test can be taken as necessarily being applicable for all purposes in which the question of whether someone is "Indigenous" may arise.

18. It may be that, in the particular context of this case, [NAME] and [NAME] could be taken to have adopted the ALRC test for the purpose of the contractual commitments between them. But it is not necessary to resolve this question in order to decide the case. It is enough to say that even if the definition did apply, it would underline that the identification of a person as being, or not being, "Indigenous" involved a number of factual investigations, the application of which might be contestable for particular individuals.

19. With this background, I turn to the way in which "Indigenous" participation was addressed in the August proposal.

20. I should say at once that I do not accept [NAME]'s contention that it was implicit in the terms of the August proposal that the work to be provided by [NAME] was work which did not require an NV1 or NV2 security clearance. The relevant passage in the August proposal spoke only of providing employment opportunities to "Indigenous" persons. It hardly needs to be said that there is no legal impediment to an "Indigenous" person obtaining an NV1 or NV2 security clearance. Elsewhere in the August proposal, [NAME] spoke of encouraging its "Indigenous" employees to become more employable by achieving higher levels of security clearance. That is quite inconsistent with the idea that the work provided by [NAME] from which [NAME]'s "Indigenous" employees might benefit necessarily excluded work requiring an NV1 or NV2 security clearance for the whole life of the contract with [NAME].

21. The proposal contained figures specifying that 68,000 hours of work were to be provided with a value of $2.8 million per annum. But the evidence shows that in fact these figures were historical ones based on the parties' earlier understanding of what hours the contract with [NAME] would require. Any reasonable observer would appreciate that such figures would not necessarily be reflected in the contract and subcontract as let. In fact the 68,000 hours figure did exceed the hours in the [NAME] as let, and significantly exceeded the hours ultimately allocated to [NAME] under the [NAME].

22. The introductory words in the proposal did not contain any specific figures and simply referred to hours "equal to" the relevant contract. [NAME] submitted that the 68,000 figure would prevail over this. I have the opposite view; I would think that a reader familiar with the prior negotiations between [NAME] and [NAME] would give primacy to this as describing the commitment. The 68,000 hour figure would, on this view, be ignored as a falsa demonstratio. But on any view the wording is ambiguous, if not internally contradictory.

23. The proposal referred to work being provided in areas in "most need of Indigenous engagement" but did not fully define those areas. All it did was mention regional New South Wales, regional Queensland and regional South Australia (which, even individually, are huge areas) as being "of particular interest". A reader would have no idea which new jobs would be going where. This is hardly surprising as the evidence does not reveal that there was any discussion between representatives of [NAME] and [NAME] on the question. The language was studiously vague.

24. The key sentence in the proposal contained the words "where possible". The introduction of those words made the drafting clumsy. But when the whole sentence is read carefully, the words were important. They were clearly designed to qualify any representation [NAME] might otherwise have appeared to have been making that all of the work which it would receive under the subcontracts from [NAME] would be allocated to employees who were "Indigenous". The words were a let-out for [NAME]. They underlined that [NAME] was using the language of aspiration rather than of commitment.

25. This does not mean that it was impossible to put the commitment, as it was referred to in the proposal, into contractual language as between [NAME] and [NAME]. But the only way of doing so would be to read it as a commitment by [NAME] that the specified number of hours to be provided by [NAME] would be hours which it would be possible for [NAME] to allocate to "Indigenous" employees.

26. This leads to the third important factor. A commitment in such a form would produce a very one-sided contract. [NAME] would effectively be undertaking to provide tens of thousands of hours of work per annum which would be suitable for whichever employees [NAME] had on its books who happened to be "Indigenous". In effect, it would become [NAME]' responsibility to provide work for [NAME]'s "Indigenous" workforce, whatever their level of qualification and wherever in Australia they might happen to live. This obligation would be open-ended, as [NAME] would have no knowledge of, or control over, who [NAME] recruited as its "Indigenous" workers.

27. A contractual arrangement based on the terms of the August proposal, would be one-sided for another reason as well. As I have already pointed out, the natural meaning of the reference to "this contract" in the August proposal, is to the head contract with [NAME]. [NAME]' benefits from the arrangement would be limited to the term of the [NAME]. The Subcontract could be terminated by [NAME] on only 30 days' notice. In the event of termination, [NAME]' obligation to provide "Indigenous" advancement would, on [NAME]'s construction, continue for as long as the head [NAME] lasted, even though [NAME] would be receiving no benefit under that Contract.

28. It is well accepted in the construction of commercial contracts that the Court will lean against a construction which produces a result which is commercially absurd or capricious: [NAME] (1973) 129 CLR 99; [1973] HCA 36 at 109 per Gibbs J. The one-sided result which would flow from [NAME]'s construction brings this principle into play.

29. A further potential difficulty with a contractual analysis of the August proposal concerns the question of consideration. In submitting the proposal, [NAME] was only engaged in an invitation to treat. The proposal was not one which was capable of immediate acceptance by [NAME]. It would always have been open to [NAME], even after its designation as preferred respondent, to withdraw from the contract-letting process. In these circumstances, it is not easy to identify what consideration [NAME] could have provided to [NAME] by lodging the proposal with [NAME]. 30. [NAME] sought to avoid this problem by characterising the proposal as involving an unconditional undertaking on [NAME]'s part to undertake the work which [NAME] was supposedly committing to provide. I doubt that this analysis is correct. A sub-contracting arrangement of this type requires a degree of flexibility. [NAME] might have had work available, which, for one reason or another, was not suitable for [NAME]'s employees. [NAME]' commitment is, it seems to me, much better analysed in contractual terms as an undertaking to offer work to [NAME], rather than an absolute obligation to provide work which [NAME], in advance, accepted and agreed to undertake. But it is not necessary to pursue this further.

31. In light of the three factors which I have analysed above, I consider that [NAME]' commitment, as a matter of proper construction, was limited to the terms of the March 2015 letter. It was not an unconditional undertaking to provide a specified number of hours to [NAME], and it did not require [NAME] to provide work other than work requiring an NV1 or NV2 security clearance. [NAME]'s contractual claim fails.

Conclusion and orders 1. I have concluded that: (1) [NAME]'s equitable set off defence fails and [NAME] is entitled to judgment for the amount of its unpaid invoices; (2) [NAME]'s contractual claim fails and should be dismissed.

1. I will hear the parties, if necessary, on the quantification of interest and on costs.

2. The orders of the Court are:

1. Order that the Plaintiff's claim be dismissed.

2. Direct that the Defendant/Cross-claimant bring in short minutes of order providing for judgment in its favour on the cross-claim and costs within 14 days of today's date; and in the event of any disagreement about the terms of those orders, that the proceedings be listed for further hearing by arrangement with [NAME].

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Amendments 25 June 2019 - minor typographical amendments 05 July 2019 - amend minor typographical error DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 05 July 2019