N4704

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO 1596 OF 2009

KURUMBUKARI LIMITED
Plaintiff

V

ENFI (PNG) CO LIMITED
Defendant

Madang: Cannings J
2011: 9, 16 December,
2012: 25 June

CONTRACTS – breach of contract – variation of terms – whether variation can be implied from conduct of parties

The defendant engaged the plaintiff under a fixed price written contract to strengthen bridges and build road diversions to enable the defendant to transport heavy machinery along a highway to a mine site. The plaintiff performed works under the contract and was paid the contract price but invoiced the defendant additional sums amounting to 98.8 per cent of the contract price, claiming that it had expended those sums due to a change in scope of works of the contract at the request of the defendant. The defendant refused to pay any of the additional sums. The plaintiff commenced proceedings for breach of contract, claiming that the contract had been varied by conduct of the parties and that the defendant's failure to pay any of the additional sums constituted a breach of contract and that the defendant was liable for damages. A trial was conducted on the issue of liability.

Held:

(1)	A contract may be varied by agreement between the parties to the contract; and such an agreement may be express or implied.

(2)	If one party gives no specific instructions to the other party to the contract to perform additional works but stands by knowing that the other party is doing additional works and approves of the work being done, that amounts to an implied instruction to carry out those additional works, despite there being no express agreement as to price.

(3)	Here, the scope of works changed when it became apparent to both parties that the original scope would not be sufficient to enable all the heavy machinery to be transported safely to the mine site.

(4)	Additional works were carried out with the defendant's knowledge and consent, so there were implied instructions to carry out those works; thus the conduct of the parties gave rise to an implied agreement to vary the contract.

(5)	The failure of the parties to agree on the price of the additional works did not relieve the defendant of liability to pay a reasonable price for the additional works performed, calculated in accordance with pricing formulae incorporated in the original contract.

(6)	Liability was established and the question of assessment of damages was referred to mediation.

Cases cited

The following cases are cited in the judgment:

Nivani Ltd v China Jiangsu International Ltd (2007) N3147
Bio-Normalizer (PNG) Ltd v CPL (2009) N3649
Yange Langan v The State (1995) N1369

TRIAL

This was a trial on liability for breach of contract.

Counsel

J Maingu, for the plaintiff
P K Kunai & G Anis, for the defendant

25 June, 2012

1. CANNINGS J: The question in this case is whether the defendant, Enfi (PNG) Ltd, is liable in damages for breach of contract to the plaintiff, Kurumbukari Ltd. They entered into a fixed price contract, the plaintiff performed works under the contract, the defendant paid the plaintiff the contract price, and then the plaintiff invoiced the defendant additional sums amounting to 98.8 per cent of the contract price, claiming that it had expended those sums due to a change in scope of works of the contract by and at the request of the defendant. The defendant refused to pay any of the additional sums. The plaintiff claims that the contract was varied by conduct of the parties and that the defendant's failure to pay any of the additional sums constitutes a breach of contract. In the alternative the plaintiff asserts that the court should intervene as the contract was harsh and oppressive in its operation.

THE CONTRACT

2. The parties entered into a written contract in December 2008 under which the defendant engaged the plaintiff to strengthen bridges and construct road diversions to enable it to transport heavy machinery from Lae, Morobe Province, along the Bruce Jephcott Highway to the site of the Ramu Nickel-Cobalt mine at Kurumbukari, Madang Province. There are on the highway between Waterais Junction and Usino Junction many river crossings. Normal traffic traverses them by permanent bridges, but most of the bridges are single-lane and not strong enough to bear loads created by movement across them of machinery of the size and weight to be transported to the mine. The plaintiff was engaged to temporarily modify some of the bridges, for example by removal and replacement of fender posts, and to construct detours around other bridges and construct ford crossings. The contract was for a fixed price of K1,509,154.02 plus GST and the method of calculation of the price was included in a schedule to the contract, which showed the pricing of 24 groups of activities. These were:

•	Group 1, project management
•	Group 2, supervision, establishment and mobilisation
•	Group 3, construction of detour by ford at 15 crossings from Usino to Yamagi Camp
•	Group 4, land issues and day labour at sites
•	Group 5, removal and reinstatement of fenders posts and refilling potholes
•	Groups 6 to 24, detour by ford crossing construction at 19 bridges.

3. Each activity group was priced and within each group the method of calculation of the price was shown by quantity, unit and rate. For example, group 6 was priced as follows:

6.00	Group 6: Detour by ford crossing construction at Gusap Bridge crossing 	Qty	Unit	Rate	Amount	
6.01	Excavation and removal of earth at river banks	40.00	m3	25.00	1,000.00	
6.02	Preparation and formation of wet crossing (detour)	200.00	m	100.00	20,000.00	
6.03	Isolated gravelling of wet crossing (200 x 6 x 0.2 m)	560.00	m3	50.00	28,000.00	
6.04	Compaction of wet crossing	200.00	m	50.00	10,000.00	
6.05	Culverting and netting				50,000.00	
	Total group 6				109,000.00	

4. The prices of the 24 groups were added together to arrive at a "Sub-total engineer's estimate" of K1,371,958.20 and to that sub-total a 10% contingency was added, giving a "Grand total engineer's estimate" of K1,509,154.02, which was the contract price (plus GST).

5. When the contract was being performed in 2009 it became apparent that wet crossings would not be appropriate for all river crossings so the parties agreed that a mobile foldable bridge should be used. The defendant imported one from China and provided it to the plaintiff and it was deployed at some of the river crossings. The contract was then completed. The machinery was transported to the mine and the defendant paid the contract price.

6. Then the dispute at the centre of these proceedings arose. The plaintiff invoiced the defendant for the additional amount of K1,490,850.02, which is 98.8 per cent of the contract price, claiming that it had expended those sums due to a change in scope of works of the contract that had occurred at the request of the defendant. This gives rise to the question whether the contract was varied in such a way that the defendant is obliged to pay to the plaintiff any sum in addition to the contract price.

WAS THE CONTRACT VARIED?

7. The court received evidence from the plaintiff's managing director and the consulting civil engineer the plaintiff engaged to settle the original scope of works and calculate the contract price, and from the defendant's logistics manager and one of its civil engineer employees. Having considered that evidence I make these findings of fact:

•	there was no express agreement to vary the contract;

•	nothing was put in writing about the decision to deploy the mobile bridge, which had been imported from China by the defendant and provided to the plaintiff;

•	the decision was made orally;

•	there was no express agreement that the defendant would pay the plaintiff any further sums in addition to the contract price;

•	as a result of deployment of the mobile bridge, which had been imported from China by the defendant and provided to the plaintiff, the plaintiff incurred costs not included in calculation of the contract price in the schedule to the written contact, eg hire of trucks, cranes, prime movers, overtime for drivers, engagement of extra casual employees, extra project supervision, extra camping rations.

8. To those facts I will apply the principles of law set out by Lay J in the leading PNG case on contract variation, Nivani Ltd v China Jiangsu International Ltd (2007) N3147 (followed by Hartshorn J in Bio-Normalizer (PNG) Ltd v CPL (2009) N3649):

•	a contract, even a written one that makes no provision for variation, may be varied by agreement between the parties to the contract;

•	an agreement to vary a contract may be express or implied;

•	an implied agreement to vary a contract can arise by virtue of the conduct of the parties;

•	if one party gives no specific instructions to the other party to perform additional works but stands by knowing that the other party is doing additional works and approves of the work being done, that amounts to an implied instruction to carry out those additional works, even if there has been no express agreement as to the price payable;

•	the failure of the parties to agree on the price of the additional works does not relieve the employer of liability to pay a reasonable price for the additional works performed.

9. Here, I find that the scope of works of the contract was materially changed when it became apparent to both parties that the original scope of works would not enable all the heavy machinery to be transported safely to the mine site. Additional works, involving deployment of a mobile bridge, which had been imported from China by the defendant and provided to the plaintiff, were carried out with the defendant's knowledge and consent. There were implied instructions to carry out those works. Thus the conduct of the parties gave rise to an implied agreement to vary the contract.

10. I conclude that the original contract was varied, in that it was agreed that the scope of works would be changed and that the plaintiff was required to perform additional works involving deployment of a mobile bridge. In view of the detailed calculations showing how the contract price was arrived at, which are set out in the schedule to the contract and which made no mention of deployment of a mobile bridge, it must be implied that a term of the varied contract would be that the defendant is liable to pay a reasonable price for the additional works performed, calculated in accordance with the pricing formulae incorporated in the original contract.

WAS THERE A BREACH OF CONTRACT?

11. I uphold the plaintiff's argument that the defendant's refusal to pay anything to the plaintiff in addition to the contract price of K1,509,154.02 constitutes a breach of the varied contract. It is unnecessary to consider the alternative argument about the contract being harsh or oppressive.

WHAT ORDERS SHOULD BE MADE?

12. As this trial was confined to the issue of liability, no assessment of damages will be made. Assessment of damages is not a formality. The plaintiff seeks in its statement of claim the sum of K1,717,223.12, comprising the amount of additional costs (K1,490,850.02) it says it incurred due to variation of the contract plus a 15% profit margin (K226,373.10). The plaintiff is not necessarily entitled to that sum. It needs to prove its losses (Yange Langan v The State (1995) N1369). And the defendant still wants to argue (as is apparent from the evidence adduced for the purposes of the present trial) that the extra costs incurred by the plaintiff were unnecessary and a product of its mismanagement. This raises the question of how damages should be assessed. There are at least three options available to the court: (1) order a trial on assessment of damages or (2) let the parties resolve the matter or (3) order mediation.

13. Under the ADR Rules the National Court is empowered by Rule 5(2), of its own motion, to order mediation for a resolution of any part of any proceedings provided that at the time of considering whether to order mediation it has regard to the factors prescribed by Rule 5(3). I have had regard to those matters. I consider that: (a) mediation will not result in prejudice to the rights of either party; (b) it is reasonably within the ability and power of both parties to comply with a mediation order; (c) mediation will not entail substantial work for either party; (d) the nature of the relief sought lends itself to mediation; (e) a mediation at Madang can be set up very soon and this should be convenient to both parties; (f) neither party has expressed any opposition to the prospect of mediation; (g) mediation has not yet been attempted in this case and it should be attempted at least once before consideration is given to setting down a trial; (h) neither party loses the right to have the assessment of damages tried in court; and (i) this is a commercial dispute and it is in the interests of justice to attempt mediation as a method of resolving such disputes. I conclude that of the three options available, option (3) is the most appropriate as it is the option that has the greatest prospect of finally and quickly determining the dispute. I will therefore make an order for mediation of the question of assessment of damages.

14. As to costs I see no reason to depart from the general rule that costs follow the event. The plaintiff will be awarded costs.

ORDER

(1)	The plaintiff has established a cause of action against the defendant for breach of contract.

(2)	The question of assessment of damages shall under Rule 5(2) of the ADR Rules, on the court's own motion, be referred for mediation pursuant to a separate mediation order under Rule 5(4) of the ADR Rules.

(3)	The defendant shall pay the plaintiff's costs of the proceedings to date, on a party-party basis, which shall if not agreed be taxed.

Orders accordingly.

___________________________________
Thomas More Ilaisa Lawyers & Attorneys: Lawyers for the Plaintiff
Kunai & Co Lawyers: Lawyers for the Defendant