Santos Limited v Fluor Australia Pty Ltd & Anor [2021] QCA 204

Andrew Orford  |  Matt Hammond  |  Oliver Waddingham

Key takeouts

This decision overturns a previous Supreme Court decision, emphasising the courts’ ongoing focus on giving a commercial interpretation to contracts.  

It is a reminder to those drafting construction contracts to ensure that contract terms are defined and applied consistently throughout the body of a contract and any annexures or schedules.

Facts

The dispute relates to a contract between Santos Limited (Santos) and Fluor Australia Pty Ltd (Fluor) for the engineering, procurement and construction of facilities at Santos’ Surat Basin CSG project (contract).  Santos, the principal, alleged that Fluor, the contractor, failed to achieve Mechanical Completion by the Date for Mechanical Completion (due date). Fluor continued to receive payments from Santos after the due date for costs it would not have incurred if Fluor had achieved Mechanical Completion by the due date (MC Delay Costs).

After exercising a contractual right to inspect Fluor’s records, Santos sought repayment of $1.4 billion, including approximately $475 million of ‘MC Delay Costs’, which Santos says were overpaid. Fluor applied for summary judgment in relation to the claims for MC Delay Costs, and was successful in arguing that the MC Delay Costs were not ‘Delay Costs’ but were properly claimed, and paid, as ‘Actual Costs’ under the contract.

Clause 1.1 and schedule 3 of the contract contained two different definitions of ‘Actual Costs’. The former expressly excluded ‘Excluded Costs’, however, the latter made no reference to that exclusion. The primary judge found that the appropriate definition was that in schedule 3, meaning that costs which would otherwise fall within the definition of ‘Excluded Costs’ could be ‘Actual Costs’.

Under Clause 23 of the contract:

• Fluor was required to give Santos notice of any actual or potential failure to achieve Mechanical Completion by the due date;
• if a ‘Delay Event’ occurred that was out of Fluor’s control, Fluor was able to apply for an extension of time;
• if Fluor was granted an extension to the Due Date, Santos was to pay Fluor delay costs;
• if Fluor failed to give a notice, or applied for an extension, it was precluded from being paid for the consequences of a Delay Event; and
• Fluor was barred from making any claim ‘arising out of, or in connection with, the Delay Event or any delay and disruption of the Work’.

Under clause 24 of the contract, liquidated damages were Fluor’s sole liability, and Santos’ exclusive remedy for Fluor’s failure to achieve Mechanical Completion by the Due Date.

Decision

The Court of Appeal allowed Santos’ appeal, setting aside the decision of the primary judge, recognising that nothing in schedule 3 provided that costs categorised as ‘Excluded Costs’ should be included in the ‘Actual Costs’ for which Fluor was to be paid.       

Excluded Costs

The Court of Appeal accepted Santos’ argument that Fluor was obliged to give a delay notice under clause 23, whether the delay was due to a Delay Event or otherwise. The Court of Appeal considered whether restrictions on Fluor making Claims ‘arising out of, or in connection with, the Delay Event or any delay and disruption of the Work’ (contained in clause 23.5 of the Contract) applied whether there was not a Delay Event.

The primary judge found that the additional ‘delay and disruption’ could only be delays relating to the Delay Event and that costs such as the MR Delay Costs are not Delay Costs, but are instead a category of Actual Costs (and therefore, could be claimed).

The Court of Appeal rejected the findings of the primary judge on both matters of interpretation. It concluded that the restrictions on Fluor making claims under 23.5 applied to any delay and disruption whether or not a Delay Event had occurred. Delay Costs, including the MC Delay Costs, were a kind of Actual Cost. Therefore, on correct interpretation, Fluor’s claim for the MC Delay Costs was precluded, as it was ‘Claim’ arising out of, or in connection with, the delay.

The Court of Appeal accepted Santos’ ar5gument that the liquidated damages regime under clause 24 limited liability and remedy only, and did not affect Fluor’s entitlement to be paid costs for the performance of work.  On a proper analysis, it was held that Santos could recover monies it had overpaid, on the basis of an underlying error in the relevant payment certificates. 

‘Properly incurred’ costs

The Court of Appeal found that the parties, through the definition of ‘Excluded Costs’ had prescribed the categories of costs to be excluded, including many which Fluor should not have had to incur. The Court of Appeal concluded that such costs would be ‘actual costs properly incurred’, unless they met the definition of Excluded Costs.