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Nauru Security Services Inc. v Nauru Rehabilitation Corporation [2012] NRSC 15 (22 August 2012)

IN THE SUPREME COURT
REPUBLIC OF NAURU

Civil Case No. 19 of 2012

Between:

Nauru Security Services Inc.
Appellant

V

Nauru Rehabilitation Corporation
Defendant

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Catchwords:

Contract – Written agreement to supply security services – Contract expired without renewal – Wether defendant was obliged, in good faith, to offer renewal – Claim dismissed.

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JUDGEMENT

1. The plaintiff claims damages from the defendant for the defendant’s failure to renew a written contract for the provision of security and related services by the plaintiff to the defendant in accordance with the terms of the original contract. The plaintiff is a contractor in Nauru supplying security services. The defendant (NRC) is a corporation established by the Nauru Rehabilitation Corporation Act 1997. A board of directors the members of which are appointed by Cabinet is responsible for the policy and general administration of the corporation.
   
2. By agreement of the parties the claim is being determined in the absence of counsel on the affidavits filed by the plaintiff, and on an agreed copy of the original contract without learning oral argument from counsel. Each party, through its counsel, has filed written submissions. I commend counsel on the clarity of their submissions.
   
3. The original contract was in writing, dated 29 May 2009.The plaintiff agreed to supply security services at various sites for the duration of the contract. Clause 4 of the contract provided:
   

4. Term of Contract

4.1 Subject to clauses24, 25 and 26, this contract commences on the Effective Date and continues for a period of three (3) years(‘the Initial Term’) with an option for renewal of the Contract by the NRC for a further two (2) year period (‘the Subsequent Term’)in accordance with the clauses 4.2 and 4.3.

4.2 Within six (6) months of the expiry of the Initial Term, the Parties must commence discussion about whether the Parties wish to renew this Contract for a further two (2) years.

4.3 If the Parties agree to renew this Contract in accordance with the clause 4.2, the Contract is renewed on the same terms and conditions as this Contract except as follows:

a. Clauses 4.3 and 4.2 are excluded, and

b. The words “of three(3) years (‘the Initial Term’)with the option for renewal of the Contract by the NCR for a further two (2) year period (‘the Subsequent Term’) in accordance with clauses 4.2 and 4.3” are deleted from clause 4.1 and the words “of three (3) years are substituted.

5. Clause 4 must of course be read in its context in the whole of the contract. However, the plaintiff argues that clause 4 should be read in conjunction in particular with clauses 24, 25 and 26, especially clauses 24.1 and 24.2 which provide:
   

24 Termination Where No Default

24.1 Notwithstanding any other provision in this Contract, the NRC may, by providing three(3) months notice in writing to the Contractor terminate this Contract, in whole or in part.

24.2 If this Contract is terminated pursuant to this clause 24, the NRC will be liable only for:

(a) payment of Fees for Security Services before the effective date of termination; and

(b) any reasonable costs incurred by the Contractor and directly attributable to the termination or partial termination of this Contract, but the Contractor will not be entitled to compensation for loss of prospective profits.

6. The plaintiff argues that the original contract can only be brought to an end by the defendant following the procedure set out in clause 24.1.
   
7. The affidavit evidence filed by the plaintiff discloses that in around October 2011 discussions commenced, as required by clause 4.2, between the manager of the plaintiff and the defendants Contract Authority officer appointed under clause 9 of the original contract. The plaintiff’s manager in his affidavit says that the plaintiff had received favourable periodic review reports on the quality of its services during the currency of the original contract, and there was no reason on that score for the contract not to be renewed.
   
8. An affidavit filed by the plaintiff from the Contract Authority officer with whom the discussions had been held (the officer had in the meantime been dismissed by the defendant on 4 April 2012) asserts that in late 2011 he informed the defendant’s board of directors informally of the plaintiff’s wish to renew the contract, and that the “board agreed in principle pending satisfactory formalities”. The nature of the “satisfactory formalities” is not disclosed.
   
9. To complete the picture, the plaintiff says it heard nothing from the defendant in 2012 about the renewal of the contract, so on 25 May 2012 the plaintiff’s manager met with the chairman of the defendant’s board to enquire as to the status of their contract as the term was to expire in three day’s time. The plaintiff says that the chairman was not able to answer whether the plaintiff should stop providing services by Tuesday 29 May 2012.
   
10. On the evening of 28 May 2012 the plaintiff ascertained that new security personnel from another company were providing security services for the defendant at its sites. According to the plaintiff’s written submissions, the plaintiff also received correspondence from the defendants chairman and from its Acting CEO advising that the original contract would not renewed. The plaintiff has not provided security services to the defendant since that date.
    
11. The defendant has not responded to the facts deposed to in the plaintiff’s affidavits. As I understand the defendant’s case, the defendant says that there is no need for it to do so as the facts deposed to in the affidavits are irrelevant to the outcome of the case. Absent a response from the defendant, the case must be decided on the facts deposed to in the affidavits filed by the plaintiff.
    
12. The defendant’s case is simply that the original contract ran its full term and automatically came to an end on 28 May 2012, being the last day of the Initial Term. As an additional matter, the amended defence pleads that an extension of the original contract could only be granted by the defendant exercising the option exclusively given to it under clause 4.1; as was its right, the defendant did not exercise the option to renew the contract.
    
13. The plaintiff argues that the defendant’s refusal to renew the original contract contravenes its terms. In breach of the contract three months notice of intention to terminate the contract was not given under clause 24 which it is contended entitles the plaintiff to payments under clause 24.2. The plaintiff further submits that the defendant “by failing to observe its own procurement procedure and process under its Procurement Manual deliberately denied the plaintiff natural justice to bid for the services and instead directly appointed an unregistered company with no proven service or experience in managing and operating a security company. Furthermore the Board had acted in contravention of their fiduciary duties as Director by deliberately failing to observe the Corporation’s Procurement process and providing false information regarding the assessment of the Plaintiff’s performance.”
    
14. The plaintiff seeks the following damages:
    
    • Under clause 24.2 (a), three months billings as termination occurred without notice - $86,775
    • Under clause 24.2 (b),administrative and overhead costs - $18,000; and
    • A further 21 months fees for services as punitive damages for the defendant not acting in good faith and without due regard for the past performance of the plaintiff - $985,425.
      
15. In my opinion the outcome of the case turns on the proper construction of clause 4.1. The essential purpose of the clause was to specify how long the contract was to operate, that is, to specify its term. Subject to clauses 24, 25 and 26 the contract is to run for a period of three years from the commencement date, that period being designated the Initial Period, but attached to the Initial Period is “an option for renewal of the Contract by the NRC for a further two (2) year period”.
    
16. The point of specifying in a contract the period or term over which it is to run is to indicate when the obligations and rights of the parties under the contract come to an end. Had the contract not contained clauses 4.2, 4.3 and 24 and the so called option for renewal in clause 4.1, the situation would be plain. Each party would have been obligated to the other for three years, and at the end of that time their relationship would be at an end.
    
17. The plaintiff’s argument that the Initial Term under clause 4.1 does not just come to an end in this way at the end of the three year period rests on clause 24.1.The plaintiff interprets clause 24.1 as requiring that three months notice is necessary to terminate the contract even at the end of the Initial Term. I am unable to accept this interpretation. If it were correct, there would be no point in clause 4.1 specifying an Initial Term as the contract would simply run on until notice was given. Theoretically it could run on indefinitely.
    
18. Not only does the plaintiff’s interpretation mean that the contract is inevitably one of indefinite duration, it would have the other extraordinary consequence that (except for termination for default under clause 25 or the happening of a “termination event” under clause 26) the contract could run on as long as the defendant wanted without there being any scope for the plaintiff to bring the contract to an end. This is so as clause 24 only gives the right of termination by notice to the defendant.
    
19. The meaning of clause 24 is not to extend the Initial Term (or for that matter any Subsequent Term under clause 4.3) beyond the stated fixed period of years, but to give the defendant a unilateral right to cut the duration of the contract (the Term) short by giving three months notice to the plaintiff.
    
20. The reference in the opening words of clause 4.1 to clauses 24, 25 and 26 is simply to flag that the Initial Term may be cut short by one of the events specified in those clauses. The right given to the defendant in clause 24 to terminate on notice is a right exercisable during the currency of the contract and cannot be construed as having application once the contract has run its term and come to an end.
    
21. The plaintiff’s argument that the defendant was in breach of the contract by treating it as at an end on 28 May 2012 because no notice had been given under clause 24 cannot be sustained.
    
22. The further grounds on which the plaintiff alleges that the defendant is liable in damages are a failure to act in good faith and a breach of fiduciary duty.
    
23. I understand the allegation of failure to act in good faith to allege a breach either of an express term of the contract in clause 6.9, or an implied term attaching to the requirement to commence discussions under clause 4.2. and that the particulars of the conduct relied upon include the failure to give due weight to the quality of service provided during the original contract, and the failure to follow processes set out in the defendants Procurement Manual including the failure to go through a public and competitive tender process in which the plaintiff could participate, a failure that also amounted to a denial of natural justice.
    
24. Before dealing with these allegations, I think it is necessary to further consider the meaning and requirements of clause 4. The defendant contends that clause 4.1 gave the defendant an exclusive option to renew the contract which had the effect of giving the defendant an unfettered discretion whether or not to renew.
    
25. I do not agree that clause 4.1 gave an exclusive option to renew to the defendant. The critical words in the clause are: “... with an option for the renewal of the Contract by NRC...”
    
26. The defendant’s argument emphasises the words “by the NRC”. The defendant contends that these words in context mean that the option is a one-sided one exclusive to the defendant. This construction has a number of problems. It seeks to read the relevant words as if the extra word “exercisable” is placed before “by the NRC”, but notably that word is not there. Moreover, such an interpretation of the relevant words is not consistent with the grammatical construction of the clause. The words “by the NRC” refer back not to “an option” but to “renewal of the contract”. Nevertheless the notion that the contract would be renewed by the NRC, and not by both parties, does give some support for the view that the renewal contemplated is for the decision of the NRC. On the other hand, if the option was one exclusively available to NRC to exercise or not, it is strange that clause 4.2 requires that both parties must commence discussions about whether they wish to renew the contract. More importantly, such an interpretation is wholly inconsistent with the opening words of cause 4.3: “If the parties agree to renew this Contract...”.
    
27. Having regard in particular to the opening words of clause 4.3 I do not consider the interpretation of clause 4.1 contended for by the defendant can be maintained.
    
28. Notwithstanding that the word “option” is used in clause 4.1, I consider it is made clear by clauses 4.2 and 4.3 that what clause 4 contemplates is that towards the end of the Initial Term, the parties will discuss whether they wish to renew the contract, but that there is no right in either party to force the other into a renewal. The so called option is in reality no more than an expression of their future willingness to consider reaching a new agreement. Clause 4 imposes no obligation on either party to agree to renew the contract.
    
29. On the facts put forward by the plaintiff the parties did commence discussions as required by clause 4.2. Unlike some other clauses in the original contract clause 4 does not expressly impose an obligation on either party to act in good faith in the discussions. The plaintiff argues that such an obligation arises from clauses 6.8 and 6.9. Clause 6.8 relates to the supply of security services and could have no relevance to discussions over a renewal. Clause 6.9 provides:
    

The parties agree that in undertaking any act, fulfilling any obligation or exercising their rights under this Contract, they will act in good faith and in a manner so as not to unreasonably interfere, in any material respect, with the other Party’s ability to meet its obligations in accordance with this Contract.

Under this clause the obligation to act in good faith is so as not to interfere with the other party’s ability to meet its obligations. What is alleged by the plaintiff is that a want of good faith on the part of the defendant interfered with the defendant’s ability to meet the defendant’s obligations under the contract. That is not what clause 6.9 is dealing with.

30. However, even if it is accepted that the defendant was under an obligation to act in good faith in carrying out its obligation to commence discussions about whether the parties wish to renew the contract, such an obligation would impose no greater duty on the defendant than not to engage in dishonest or deceptive conduct. The duty imposed would not require the defendant to carry out any particular evaluation of the performance of the plaintiff under the original contract, or to go through any particular selection process in deciding to grant the contract for the next contract period. Clauses 4.2 and 4.3 do not restrict the defendant in how or what it decides about the provision of future security services.
    
31. Notions of natural justice which the law will imply into some decision making processes have no application to situations of commercial bargaining over the supply of goods or services. In bargaining of that kind each party is entitled to look after its own interests and is restrained only by laws against misrepresentation, fraud and dishonesty. Bargaining may be harsh and leave one side most dissatisfied, but that gives no cause of action.
    
32. It seems clear that the defendant did not go through a competitive public tender process in the manner anticipated by the defendant’s Procurement Manual. However, that document is an internal management document issued to its staff by the defendant as a general good practice guide. A failure to follow a process specified in the Manual gives no cause of action or rights to third parties. The failure to go through a tender process gives the plaintiff no cause of action. The Manuel does not restrict the discretion of the board to act in a particular case as the board considers necessary for the good management and administration of the defendant.
    
33. The affidavit material filed by the plaintiff does not suggest any dishonest or deceptive conduct on the part of the defendant. The reference in the plaintiff’s submissions to the directors providing false information regarding the assessment of the plaintiff’s performance is curious. The evidence says nothing about what information was before the directors, or why they made the decision they did. Moreover, even if it were the fact that the directors acted on information that was not correct that given no cause of action to the plaintiff. The evidence goes no higher than to suggest disinterest on the part of the defendant in renewing the contract after the discussions in about October 2011 and in the months leading up to the end of the Initial Term. The evidence does not establish a failure on the part of the defendant to act in good faith in relation to the obligation imposed on the defendant under clause 4.2.
    
34. The allegation that a breach of fiduciary duty by the directors gives the plaintiff a cause of action is misconceived. It may be accepted that directors owe fiduciary duties to their company, but a breach of those duties is actionable only by the company, not by third parties. The evidence does not suggest a breach of fiduciary duty by the defendant’s directors, but even if it did it gives the plaintiff no ground to claim damages.
    
35. For these reasons I consider the plaintiff has failed to establish its case.
    
36. On 28 May 2012 the legal position was, as the defendant contends: the original contract had run its full term and came to an end that day.
    
37. The plaintiff’s claim therefore fails and must be dismissed. The plaintiff must pay the defendant’s costs.