Data

Date:: 12-02-2003
Country:: Australia
Number:: NG733 of 1997
Court:: Federal Court of Australia
Parties:: GEC Marconi Systems Pty Ltd. v BHP Information Technology Pty Ltd. and Others

Keywords

LONG-TERM CONTRACTS - ADMINISTRATIVE CONTRACTS - SOFTWARE DEVELOPMENT AGREEMENT - BETWEEN THE COMMONWEALTH OF AUSTRALIA AND TWO AUSTRALIAN SOFTWARE COMPANIES - GOVERNED BY AUSTRALIAN LAW - REFERENCE TO THE UNIDROIT PRINCIPLES AS A MEANS TO INTERPRET AND SUPPLEMENT APPLICABLE DOMESTIC LAW

NO ORAL MODIFICATION CLAUSE - EFFECTIVENESS - EXCEPTION IN CASE OF ESTOPPEL (REFERENCE BY COURT TO ART. 2.18 [ART. 2.1.18 OF THE 2004 EDITION] OF THE UNIDROIT PRINCIPLES)

CONTRACT FOR DEVELOPMENT OF SOFTWARE - CONTRACT PROVIDES FOR PAYMENTS TO BE MADE IN AGREED INSTALMENTS THROUGHOUT THE DURATION OF THE WORK - INSTALMENTS NOT CONDITIONAL ON COMPLETION OF WORK (REFERENCE BY COURT TO ART. 6.1.4, COMMENT 2, OF UNIDROIT PRINCIPLES)

DUTY OF GOOD FAITH AND FAIR DEALING - IMPLIED TERM OF ALL CONTRACTS -ENTIRE AGREEMENT CLAUSE NOT SUFFICIENT TO PRECLUDE SUCH IMPLICATION (REFERENCE BY COURT TO ART. 1.7 OF THE UNIDROIT PRINCIPLES; ART. 1.201 OF THE PRINCIPLES OF EUROPEAN CONTRACT LAW)

Abstract

The Commonwealth of Australia ("the Commonwealth") and the two Australian software companies BHP Information Technology Pty Ltd ("BHP-IT") and GEC Marconi Systems Pty Ltd ("GEC Marconi") entered into back-to-back-fixed price contracts for software development and systems integration in the Australian Diplomatic Communication Network, a network for communication to and from Australia´s overseas missions. The contract between the Commonwealth and BHP-IT was the "Head Contract", the contract between BHP-IT and GEC Marconi the "Sub-Contract". The actual software was to be developed by GEC Marconi, but special boundary security devices ("STUBS devices") were to be supplied by the Commonwealth to BHP-IT, which in turn would supply them to GEC Marconi for integration with the software being developed by GEC Marconi. The parties were obliged to perform their obligations in accordance with a special Implementation Plan, which provided for 5 successive development phases or "milestones", at the achievement of which by GEC Marconi BHP-IT had to make the corresponding progress payments.

The dispute arose when GEC Marconi served a notice of termination of the Sub-Contract on BHP-IT on the ground of alleged failures on the part of BHP-IT to comply with its contractual obligations. In particular, GEC Marconi complained that BHP-IT had failed to provide the STUBS devices as required by the Sub-Contract, and refused to pay GEC Marconi for its achievement of the fourth milestone again as required by the Sub-Contract. BHP-IT did not deny these facts but contended that the Sub-Contract had been amended by agreement to remove the obligation to provide the STUBS devices and to substitute them with emulation software; as to its refusal to pay for the fourth milestone, it argued that GEC Marconi was not entitled to be paid as it had not complied with the requirements of payment under the Sub-Contract.

GEC Marconi commenced a legal proceeding against BHP-IT before the Federal Court of Australia, which led to a number of cross-claims, first, by BHP-IT against GEC Marconi and, secondly, by the Commonwealth against BHP-IT.

Both the Head Contract and the Sub-Contract were domestic contracts and as such governed by Australian law. Nevertheless, on a number of occasions the Court, apparently with the intent to further corroborate its deliberations, also referred to foreign sources – mainly to U.S. and English law – as well as to international instruments such as the UNIDROIT Principles of International Commercial Contracts and – though to a lesser extent – the Principles of European Contract Law.

Thus, with respect to BHP-IT´s objection that the Sub-Contract had been amended, the question arose as to whether the existence of a "no oral modification" clause in the Sub-Contract precluded, as GEC Marconi argued, the making of an oral or implied variation agreement, or whether in any case a party could by its conduct be estopped from invoking the "no oral modification" clause, as BHP-IT argued. In rejecting GEC Marconi´s argument and deciding in favour of BHP-IT, the Court referred, among others, to Article 2.18 [Art. 2.1.18 of the 2004 edition] of the UNIDROIT Principles, which, while as a rule giving effect to contract clauses imposing a writing requirement for subsequent modifications, provides that a party may be precluded by its conduct from invoking such clause to the extent that the other party has acted in reliance on that conduct.

Likewise, in rejecting BHP-IT´s argument according to which the Sub-Contract contained an "entire obligation", i.e. the first four milestone payments were conditional upon complete performance of the contract, so that GEC Marconi, having failed to achieve the fifth and final milestone, was obliged to refund the previous four milestone payments it had received, the Court referred among others to Comment 2 to Article 6.1.4 of the UNIDROIT Principles, stating that, while as a rule if the performance of only one party´s obligation by its very nature requires a certain period of time, that party is bound to render its performance first, circumstance may indicate the contrary, e.g. where the contract provides for payments to be made in agreed instalments throughout the duration of the work.

Finally, with respect to BHP-IT´s contention that in terminating the Sub-Contract GEC Marconi had breached an implied contract term requiring it to act honestly, fairly and reasonably, and to GEC Marconi´s objection that, a duty of good faith, even if generally implied by law, could not be implied in the contract in the case at hand on account of the so-called "entire agreement" clause contained in the Sub-Contract, the Court, while pointing out that in Australian law there was no such mandatory rule of law imposing on the parties the duty of good faith and fair dealing, such as § 1-102(3) of the United States Uniform Commercial Code or Articles 1.7 of the UNIDROIT Principles and 1:201 of the Principles of European Contract Law, concluded that the duty of good faith and fair dealing was to be considered an implied term of all contracts, and the mere fact that the contract contained a "entire agreement" clause was not sufficient to preclude such an implication.

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