Court of Appeal interprets entitlement to delay costs under cost plus contract

In Santos Limited v Fluor Australia Pty Ltd [2021] QCA 204 the Queensland Court of Appeal was asked to interpret a builder’s entitlement to costs incurred after the contractual date for completion, under a cost plus contract.

Santos engaged Fluor Australia to engineer, procure and construct three coal seam gas ‘hubs’ and associated infrastructure, under a partially cost plus contract. Fluor failed to achieve the required stage of ‘Mechanical Completion’ by the due date, and did not claim any extensions of time in respect of the delays.

Relevantly, under the contract:

•    the contract price was made up of three components, including Fluor’s Actual Costs;
•    Actual Costs were costs properly incurred by Fluor in performing the Work, but excluding ‘Excluded Costs’;
•    Excluded Costs were 11 categories of costs, capturing any costs incurred by Fluor as a result of breach, for which Fluor was entitled to reimbursement elsewhere, or which were precluded or expressly excluded under the Contract.

Following completion of the project, Santos commenced proceedings in the Queensland Supreme Court seeking extensive relief. This included, amongst other amounts, approximately $475 million for return of ‘MC Delay Costs’. Santos considered that it had been wrongly charged for, and incorrectly paid to Fluor, these costs being:

•    costs incurred after the due date for Mechanical Completion;
•    which would not have been incurred had Fluor completed the hubs by the due dates.

Fluor applied for summary judgment on this part of Santos’ claim, arguing that it must fail on the proper interpretation of the contract, because the delay costs were properly claimed and paid as Actual Costs. The Supreme Court agreed.

Santos appealed to the Queensland Court of Appeal against that judgment.

The Court of Appeal engaged in a careful consideration of the parties’ arguments and the proper interpretation of the contract terms and ultimately found in favour of Santos on this point, refusing the application for summary judgment. McMurdo JA, with whom Mullins JA and Davis J agreed, found that under the terms of the contract:

•    Just because a type of costs may be recoverable as ‘Actual Costs’, this did not override the exclusion of those costs as Excluded Costs. For example, while Actual Costs may include reimbursement of the costs of Fluor’s subcontractors, this does not prevent them being Excluded Costs if the reimbursement resulted from Fluor’s breach of the subcontract.
•    On a careful consideration of the contract’s EOT provisions, it was correct to say that Fluor was precluded from claiming time-related costs related to delay for which it was not entitled to an extension of time. Costs which Fluor is precluded from claiming under the Contract, was a category of Excluded Costs. This meant the MC Delay Costs could not form part of Fluor’s claim for Actual Costs.
•    A clause stating that liquidated damages were Santos’ sole remedy and Fluor’s sole liability for delay, was no bar to Santos’ claim. That is because Santos’ claim did not represent a remedy which Santos enjoyed and a liability with which Fluor was burdened. It was the proper operation of the pricing terms of the contract to reverse mistaken payments.

In light of the Court of Appeal’s decision, the Supreme Court’s summary judgment on the relevant parts of Santos’ claim is overturned, and proceedings on Santos’ overall claim are moving forward in the Queensland Supreme Court.

The full decision can be found here.