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Attorney General v Pacific Risk Consulting Engineers Ltd [2012] TVHC 7; Civil Action 9.2011 (1 March 2012)

IN THE HIGH COURT OF TUVALU

Action number: Civil 9 of 2011

Civil Jurisdiction

BETWEEN:

ATTORNEY GENERAL
Applicant

AND

PACIFIC RISK CONSULTING ENGINEERS LTD
Respondent

D Gorman for applicant
J Bierre and E Tobeck for respondent

Submissions received: 23 December 2011, 16 and 30 January and 13 February 2012
Judgment: 1/3/2012

Judgment

[1] This case arises from a contract between the Government of Tuvalu (GOT) and Pacific Risk Consulting Engineers Ltd (Pacific Risk) for the provision of professional engineering consultancy services in respect of the upgrading of various aspects of the Maritime Training Institute on Amatuku. The funding agency was the Asian Development Bank (ADB). The initial contract was dated 23 January 2003 but was subsequently extended in October 2005, February 2006 and August 2007.

[2] In late 2007, concern was raised as to the adequacy of the construction of the classroom and dormitory buildings and GOT and ADB commissioned independent consultants, Beca International Consultants Ltd (Beca), to review those works. In May 2008, Beca reported that it was of the opinion that there were serious design faults and so, on 18 August 2008 under the heading 'Pacific Risk – Contracts for TMTI Upgrade', GOT advised Pacific Risk of the various design defects and requested that they remedy them.

[3] On 8 September 2008, GOT wrote to Pacific Risk under the heading 'TMTI Upgrade - Next Steps'. The letter, from the Permanent Secretary, commenced:

"The purpose of this letter is to update you on the current status of the project and to outline our views on the path forward to completion of the project. I thought it might be useful to set out these matters in writing, which we can discuss when you are available. Alternatively we welcome your written comments.

As we see it, the main outstanding issues with your involvement with the project are:

1. The remedial works for the classroom and dormitory;

2. Engineering supervision of the jetty works; and

3 engineering supervision of the remaining works."

[4] Under the heading for the Remedial works, they reiterate that they consider Pacific Risk is contractually liable for the Classroom and Dormitory and propose three options "as to how these remedial works may proceed".

"Option A - Pacific Risk accepts liability for design defects and responsibility for remedial works

Pacific Risk will (at its own cost):

1. review and modify as appropriate the designs for remedial works (which are then approved by GOT);

2. produce a bill of quantities for the remedial works in respect of each building (which is then approved by GOT);

3. purchase materials from suppliers;

4. arrange and pay for transportation of materials to site;

5. pay for labour costs associated with the remedial works; and

6. supervise the remedial works.

Option B - Pacific Risk does not accept liability for design defects and responsibility for remedial works, but co-operates to mitigate losses.

Pacific Risk will (at its own cost):

1. review and modify as appropriate the designs for remedial works (which are then approved by GOT);

2. produce a bill of quantities for the remedial works in respect of each building (which is then approved by GOT);

3. obtain quotes from two suppliers for the materials to be provided to GOT; and

4. supervise the remedial works.

GOT will then:

1. purchase materials from the preferred supplier;

2. arrange and pay for transportation of materials to site;

3. pay for labour costs associated with the remedial works; and

4. initiate arbitration proceedings to claim damages from Pacific Risk of the amounts expended in 1 to 3 above.

Option C - Pacific Risk does not accept liability and non-co-operation from Pacific Risk

GOT will:

1. review and approve the designs for remedial works;

2. produce a bill of quantities for the remedial works in respect of each building;

3. obtain quotes and purchases materials from suppliers;

4. purchase materials from the preferred supplier;

5. arrange and pay for transportation of materials to site;

6. pay for labour costs associated with the remedial works; and

7. initiate arbitration proceedings to claim damages from Pacific Risk of the amounts expended in 1 to 6 above."

[5] In a letter dated 19 September 2008, Pacific Risk advised it was prepared to accept Option A, and undertake the remedial work at its own cost. In the respondent's submissions it is asserted that "the letter (of 8 September 2008) gave the clear option to Pacific Risk to settle the dispute by accepting Option A. On 19 September 2008, Pacific Risk accepted Option A notwithstanding that Pacific Risk made it clear that it did not accept that it did not carry out the work with due diligence, skill and care".

[6] There followed some delay while arrangements were made to engage an independent engineer as a peer reviewer. At the end of March 2009 Beca agreed to perform this function. A Memorandum of Understanding between GOT and Pacific Risk was signed on 30 April 2009.

[7] Unfortunately Beca never provided the peer review. It was not possible for the remedial work to be performed until the review had taken place and, in October 2009, another consultant, Ian MacAllan and Co, was appointed to peer review the remedial works proposal.

[8] On 3 May 2010, GOT advised Pacific Risk that it intended to contract another firm to undertake the remedial works design and supervision and would seek reimbursement of the costs from Pacific Risk. A contract between GOT and Ian MacAllan was made on 6 May 2010.

[9] By an originating summons filed on 23 February 2011, GOT through the Attorney General applies for:

1. A declaration that:

(a) there is no accord and satisfaction between the applicant and the first respondent; and

(b) clause 6.08 of the consultancy agreements between the applicant and the first respondent dated 23 January 2003, 28 February 2006 and August 2007 is a binding arbitration agreement.

2. Such further orders as the Court sees fit

[10] The originating summons named Pacific Risk as the first respondent and Lumley General Insurance (NZ) Ltd as a second respondent. The second respondent filed a conditional appearance and gave notice that it would file an application to set aside the writ on the grounds that it disclosed no cause of action against the second respondent. I can find nothing on the papers before me to suggest that such an application has been made but I note that a Minute of Consent Order dated 9 December 2011, as agreed by counsel for the Applicant and "Respondent's Counsel", omits any reference to Lumley Insurance. I shall deal with GOT's application as between the applicant and the erstwhile first respondent only.

[11] The sole question for the Court is whether there is an accord and satisfaction between the parties pursuant to which GOT has released Pacific Risk from its obligations under the contractual documents, as is alleged by Pacific Risk. It is not necessary to consider the second declaration sought as the respondent accepts that, if there is no accord and satisfaction, it does not wish to argue the validity of the arbitration agreement. The applicant submits that there never was any accord between the parties and that GOT never agreed to forbear to sue on its claims arising from the contractual documents.

[12] Both parties have filed affidavits and counsel have agreed that the case can be decided on the papers. A timetable was agreed and I have been greatly assisted by the timely provision of detailed and helpful submissions and authorities by both counsel.

[13] Accord and satisfaction is the means by which a party obtains release from an obligation by an offer of valuable consideration which is different from the obligation from which release is sought. The accord is the agreement to discharge the obligation and satisfaction is the consideration which makes the agreement effective. In the present case, the respondent's contention is that the acceptance of Option A was an agreement to supplant, in particular, the arbitration agreement in the original contract by the terms of the option as set out subsequently in the Memorandum of Understanding.

[14] The applicant's case is that there was no accord. There can be no accord unless there is a clear agreement to release the other party from its obligation. Mr Gorman for the applicant, correctly points out that the court must consider the "objective intention" of each party and such intention may be demonstrated by clear terms or by an assessment of the communications and general conduct which led to it. Counsel for the respondent counters that if a party wishes to preserve its right to proceed with the original claim, an express term needs to be incorporated in the agreement to that effect.

[15] I accept that the rights under the original claim may be preserved by an express term to that effect but I cannot accept, if I correctly understand the suggestion, that a failure to include such an express reservation is invariably sufficient to demonstrate an accord. It is suggested by the respondent that the essential ingredients of accord and satisfaction are (1) dispute, (2) an agreement to settle the dispute and (3) consideration for the agreement. They are all indisputably ingredients but the second does not adequately state the position. What is needed for an accord is an agreement to settle the dispute by the release of the party from an obligation arising previously from the terms of the contract.

[16] It is correct, as the respondent points out, the options B and C refers specifically to arbitration proceedings whilst option A makes no such mention. However, it must be noted that the acceptance of Option A by Pacific Risk in its letter of 19 September 2008, was qualified. Mr Paris wrote "I am afraid I cannot agree with your statements about not having carried out the work with 'due diligence, efficiency, skill and care', and I request that you kindly state instances where this has occurred."

[17] That passage is a clear reference clause 5.01(a) of the original contract:

"General Standard of Performance by the Consultant

(a) The Consultant shall carry out the Services with due diligence and efficiency, and shall exercise such skill and care in the performance of the Services as is consistent with recognised professional standards."

[18] In his affidavit, Mr Paris states:

"28. The letter of 8 September 2008 advised there were a number of options available to Pacific Risk which essentially involved either Pacific Risk accepting responsibility to repair the various defects alleged or going to arbitration to settle the dispute.

29. In preference to going to arbitration and to settle the on-going dispute I accepted the offer as outlined in option A in the letter of 8 September 2008 in my letter of 19 September 2008."

[19] I am satisfied that the terms of Option A were premised on the acceptance by Pacific Risk of liability for the design defects and therefore of a failure to comply with clause 5.01(a). On that basis all costs would be covered by the consultant. I do not accept it provided the alternative suggested by Mr Paris in his paragraph 28 (above). The reference to arbitration in options B and C is specifically limited to the additional costs necessary to remedy the defects. That was a wise fall back provision in the options where Pacific Risk was still contesting liability. In the terms offered by GOT, option A did not need that fall back.

[20] I cannot accept that the reference to arbitration in options B and C was intended to be anything more than such a provision. The terms in which it is stated make it clear that it is a reference to arbitration over the liability to damages for the actual remedial work carried our i.e. expended under paragraphs 1 to 3 in option B and paragraphs 1 to 6 in option C. Mr Paris's qualification in his letter of 19 September 2008, set out above, was clearly a denial of Pacific Risk's liability for the design defects alleged by GOT. The letter as a whole agreed (for reasons of expediency as he states) to meet the costs involved but, as the acceptance of liability was a condition of option A, it was not an unqualified acceptance.

[21] The 'on-going dispute' to which Mr Paris refers is Pacific Risk's liability for any alleged defects. Any possible dispute over liability could take the issues wider than damages under the paragraphs specified in options B and C. The dispute which would initiate arbitration under those options was the amount of damages which would be incurred by the remedial work itself.

[22] Had option A required only an agreement for the consultant to pay the costs of the remedial work with no admission of liability, the omission of any reference to arbitration proceedings could be read with the significance suggested by the respondent. However, the terms of the option as written in the letter of 8 September 2008, if accepted, clearly made the need to initiate arbitration in the limited terms set out in options B and C otiose.

[23] Clause 5.10 (b) and (c) of the contract provides:

"(b) Consultant shall indemnify, protect and defend at Consultant's own expense, Client, its agents and employees, from and against any and all actions, claims, losses or damages arising out of Consultant's failure to exercise the skill and care required under section 5.01(a), provided, however:

' that Consultant is notified of such actions, claims, losses or damages not later than 12 months after conclusion of the Services';

' that the ceiling on Consultant's liability under this section 5.10(b) shall be limited to A$1,000,000, except that such ceiling shall not apply to actions, claims, losses or damages caused by Consultant's gross negligence or reckless conduct';

' that Consultants liability under this section 5.10(b) shall be limited to actions, claims, losses or damages directly caused by such failure to exercise the same skill and care, and shall not include liability for any actions, claims, losses or damages arising out of occurrences incidental or indirectly consequential to such failure'.

(c) In addition to any liability Consultant may have under section 5.10 (b), Consultant shall, at its own cost and expense, upon request of Client, reperform the Services in the event of Consultant's failure to exercise the skill and care required under section 5.01(a)."

[24] I am satisfied, as I have stated above, that the issue of whether or not there has been a clear accord may be determined from the correspondence and conduct of the parties before the suggested agreement and also, to a more limited extent, from subsequent events. I consider that a number of references in the correspondence demonstrate an absence of accord.

[25] Some months prior to the correspondence to which I have already referred above, there was an attempt by Pacific Risk to terminate the contract under clause 6.03 which allows, on not less than 30 days notice:

"Termination of the Contract by the Consultant

The Consultant shall promptly notify the Client in writing of any situation or of the occurrence of any event beyond the reasonable control of the Consultant which makes it impossible for the Consultant to carry out its obligations hereunder."

[26] The notifications first appeared in a letter dated 26 June 2008 from Mr Paris but, in a reply of the same date from GOT, it was pointed out:

"... I cannot at this stage accept your resignation letter as I believe that there are contractual obligations to fulfil - most notably signing off on completed work and attestation. There is also the issue of liability period. ...

As you are also aware, I have recently engaged an external consulting firm to evaluate some of the construction particularly the classroom and the dormitory and several design faults identified by the Project Manager and PWD were verified. As such, it is my intention to convene as soon as possible a meeting with [Pacific Risk] to discuss these issues in more details as Tuvalu believes [Pacific Risk] is contractually liable under its defect and liability insurance. I would insist that this meeting should take place immediately without fail."

[27] The letter by GOT dated 18 August 2008 was dealing with Pacific Risk's attempt to terminate. It is addressed to the respondent's, then, solicitor and points out there were four contracts between the parties. It continues:

"We do not accept that any of these contracts have been terminated. We note clause 7.01 on each of the contracts provides that the contracts:

'... shall be in force until the Services and all payments therefore (sic) have been completed and at such time the parties hereto shall be mutually released from all obligations hereunder.'

The Services are those specified in Appendix A of each contract. Key obligations which remain in place for [Pacific Risk] include... to re-perform the Services at the request of GOT under clause 5.10 (c) in the event of [Pacific Risk's] failure to exercise the skill and care required under section 5.01(a).

In our view, a Court would be unlikely to consider that any of the above contracts could be terminated under clause 6.03 for the reasons stated in your letter, because those reasons do not make performance of [Pacific Risk's] contractual obligations impossible. ...

It follows that GOT does not accept that any of the above contracts were terminated. Rather [Pacific Risk's] purported determination is a repudiation of its contractual obligations under the four contracts and GOT reserves all of its rights in relation to claims for damages against [Pacific Risk] for breach of its obligations under each of the above contracts. ...

Would you please confirm that [Pacific Risk] has in place the required professional indemnity insurance cover under clause 5.14(a) of each of the contracts to adequately cover the indemnity provided by [Pacific Risk] to GOT under clause 5.10(b) ...

We have particularised below the design defects in relation to the project and the remedial work, which GOT considers will be required to remedy those design defects. These design defects are the responsibility of [Pacific Risk] and GOT intends to pursue [Pacific Risk] for the full costs of any remedial works arising from these design defects, including (but not limited to) those set out below.

Design defects

On behalf of GOP, we hereby notify [Pacific Risk] of the following design defects and the proposed remedial works which GOT considers will be required to remedy those defects. [Pacific Risk] will be liable for all expenses associated with this remedial work.

In accordance with clause 5.10(c), GOT hereby requests [Pacific Risk] to re-perform the Services required to remedy the design defects outlined below. This is a matter of urgency as the deadline for the completion of the project is December 2008 ..."

[28] There follows a list of 16 defects and the work required to remedy them followed by:

"We look forward to receiving your client's comments on the remedial action proposed in the table above, in light of its continuing obligations under clauses 5.01(a), 5.02(a),5.10(b), 5.10(c) and 5.14(a) of the contracts. We also look forward to receiving confirmation and evidence of your client's insurance arrangements, as requested above.

Finally, we note that the procedure of settling any disputes that cannot be settled amicably is contained in clause 6.05 of the contracts and requires an arbitration to take place in Tuvalu under the Rules of Conciliation and Arbitration of the International Chamber of Commerce. Will you please confirm that your client is willing to take part in such an arbitration."

[29] On 1 September 2008, the respondent withdrew its notice of termination and in the letter of 8 September 2008 the three suggested options were offered. It should be noted that the section headed 'Remedial works for the Classroom and the Dormitory' commences:

"As you know, we consider Pacific Risk is contractually liable for the remedial works for the Classroom and Dormitory as outlined in a letter from the office of the Attorney General to your lawyers dated 18th of August 2008. I note Pacific Risk has not formally accepted liability for the design defects and we have not received a response from you or your law firm on this issue or notification of your insurer's details."

[30] There followed some correspondence in which Pacific Risk sought to have the remaining funds under the project released to assist them with the cost of the remedial work. In a letter dated 24 November 2008, GOT deals with that topic. The concluding paragraph states:

"In light of GOT's outstanding claims against Pacific Risk for remedial works and costs incidental thereto, we intend to withhold payment of the allowed amount of USD26,250 until GOT's outstanding claims against Pacific Risk are resolved. GOT will require Pacific Risk to complete the remaining works on the classroom and dormitory at its own cost before payment of the allowed amount will be made."

[31] I consider that also suggests that GOT was still considering the obligation to carry out the remedial works arose under the contract and further supports the lack of any agreement to forego the obligations owed to it under those contracts.

[32] I am satisfied to the civil standard of proof that the applicant had made it quite clear that it regarded the requirement to remedy the defects in the classroom and dormitory buildings as a requirement under the contract and I do not accept there is any support for the respondent's claim of an agreement to release Pacific Risk from its obligations under the contract.

[33] I make the first declaration sought and, in the stated absence of dispute by the respondent, the second also in the terms requested save for the deletion in each of the word 'first'.

[34] I have the applicant's submissions on costs in the event of success and I note the request by the respondent to make further submissions on that issue. I order that any submissions should be filed and served by the respondent within 30 days and any further submissions by the applicant in response within 30 thereafter.

Gordon Ward
Chief Justice

Delivered this 1st day of March 2012

Registrar of the High Court