AUSGeo Engineering Ltd (AUSGeo) is an Australian geological engineering company which provides consultancy and infrastructure services to several companies in the mining, transport and infrastructure sectors.
In July 2014 AUSGeo was engaged by Underground Trains Melbourne (U-Trains) to perform infrastructure assessments and coordinate the excavation works for the construction of part of the tunnel that would link Melbourne to Sydney. The contract between AUSGeo and U-Trains had an initial term of 8 years and an agreed value of $18,000,000 for the infrastructure assessment and $86,000,000 for the excavation and construction services. The infrastructure assessment was completed by January 2015, and in that same month AUSGeo invested $16,000,000 in a tunnel boring machine (TBM) which was 100% dedicated to the project.
In September 2016, an auditing procedure evidenced that U-Trains was under severe financial difficulties and as a consequence U-Trains’ Board of Directors decided to restructure the business. As part of the restructuring process, in October 2016 U-Trains temporarily suspended all existing contracts until further notice, which caused the immediate interruption of the payments to AUSGeo.
As AUSGeo’s TBM had already been underground, AUSGeo incurred $8,000,000 in order to resurface it so it could be used in other projects. Unfortunately, during the resurfacing operation part of the tunnel collapsed and damaged the TBM, causing AUSGeo to spend a further $5,000,000 having it repaired.
In March 2017 U-Trains decided to quit the construction of the Melbourne-Sydney tunnel and negotiated the cancellation of the contract with AUSGeo. While the contract was in force, AUSGeo had received from U-Trains a total amount of $30,000,000, being $18,000,000 for the infrastructure assessment services (which were already completed) and $12,000,000 as an initial payment for the construction of the tunnel.
According to the contract’s termination clause, U-Trains had to pay AUSGeo an upfront cancellation fee of 10% of the contract’s original value (i.e. $10,400,000) plus 10% of the residual value over a period of 5 years. U-Trains honoured the upfront termination payment and agreed to pay the future instalments accordingly, so the contract was terminated on 30 March 2017.
In May 2017 AUSGeo took U-Trains to Court seeking compensation for the damages caused to the TBM. On 20 August 2017 the Court ordered U-Trains to pay $25,000,000 in damages to AUSGeo.
Part A (10 marks) – Required:
For the year ending 30 June 2017, advise AUSGeo on the assessability of the payments received from U-Trains, supporting your arguments with legislative references and application of case law.