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The dangers of poorly drafted contracts are well known.
Nonetheless, disputes continue to make their way to the courts.
Faced with limited resources and real time constraints, councils
often enter into contracts that have been used previously,
containing schedules and annexures to determine scope that do not
apply to the current project.
Likewise, insufficient thought may be given to what certain
words or terms mean, and the operation of the contract’s
terms.
That said, there are ways to avoid disputes.
The overarching rule
As a general rule parties are bound by the words within the four
corners of a written contract, a principle known as the parol
evidence rule. Said another way, extrinsic evidence – such as
oral discussions held before the contract was signed – is
inadmissible in court should a contract dispute arise, unless an
exception applies.
What’s more, this rule means the courts cannot rewrite a
contract to apply an interpretation that is consistent with their
view of what is commercially sensible.
The court will only look beyond the wording of a contract where
there is sufficient ambiguity or uncertainty in its language. In
that case, it will apply a position that is consistent with the
commercial purpose of the contract and that also makes business
sense. In those exceptional circumstances, the court may then
consider external evidence such as notes, oral evidence and drafts
of documents.
Case examples
In Port Macquarie-Hastings Council v Diveva Pty Ltd
[2017] NSWCA 97, the Court of Appeal considered whether the Supreme
Court made an error in the construction of an option in a contract
for the supply and laying of asphalt in 2011. The contract merely
stated that the agreement was for 24 months with an option provided
within that term. The option included the words “with a
further twelve (12) month option available” following the
period of the tender agreement.
The Council advised Diveva it would not exercise the option and
would advertise a new tender. It also said the option could only be
exercised by Council or by mutual agreement.
Council did not offer any further work to Diveva under the 2011
contract, alleging that Diveva had not complied with the asphalting
specifications. Diveva then commenced proceedings for breach of
contract.
The Supreme Court and subsequently the Court of Appeal disagreed
with the Council’s interpretation. They found that the Council,
by way of the option, granted an entitlement to Diveva as the
successful tenderer to action the option.
Had the Council wanted sole rights to exercise this option, it
had the opportunity when the contract was drawn up to insert a
clause to that effect.
As to whether Council’s interpretation of the option should
be implied in the 2011 contract, the onus was on the Council to
prove that was the case. The Court found that to imply such words
would not operate reasonably or give business efficacy to the
agreement.
The Court of Appeal dismissed the appeal and Diveva was entitled
to damages for loss of profits and lost opportunity to tender for
two further contracts with the Council.
Another contract dispute arose in relation to a contract between
four councils and waste processing company WSN Environmental
Solutions. The dispute was over WSN’s entitlement to vary
payment terms due to having to use an alternative facility because
of odour issues at the original plant.
At issue was whether the relevant variation clause had been
activated and, as such, whether the dispute should be dealt with
under the dispute resolution mechanisms provided for in the
agreement. There were two distinct dispute resolution regimes in
the contract and a dispute arose as to which should apply. The
Court of Appeal held that the variation circumstances were not
foreseeable at the time of the contract and that WSN’s
interpretation should be preferred and the councils were
unsuccessful.
Takeaways
Councils deal with a myriad of contracts. The following steps
can help avoid or minimise the risk of a dispute:
Have contracts that are clear and concise. Seek legal review if
in doubt.
Review contracts to ensure they are relevant and suited to the
circumstances and commercial purpose to which they apply.
Keep records of discussions and copies of documents regarding
any pre-contract negotiations. Confirm positions in writing.
Know the contract, its obligations, and the time periods it
refers to.
Store records so they can be easily located, particularly as
employees come and go.
When contractual disputes arise, seek early legal advice and
representation to avoid communicating a position that may be
inconsistent with the relevant legal position.
Work with your legal representative to tailor a strategic
outcome that provides a satisfactory resolution while minimising
costs and lost time.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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