It is not a groundbreaking concept that contracts must be clearly drafted in order to avoid ambiguity and the possibility of subsequent lengthy (and often costly) disputes. In the recent appeal case of Grocon Constructors (Victoria) Pty Ltd v APN DF2 Project 2 Pty Ltd [1], this concept was revisited and confirmed, proving an important reminder of the significance of clear and consistent contract drafting.

The facts

Grocon and APN were parties to a construction contract, and a subsequent side deed which amended the construction contract (collectively, the 
contract).

A dispute arose between the parties as to amounts due to Grocon under the contract. The particular phrase in dispute was contained in the definition of ‘Actual Trade Cost’ in the side deed being “
the actual trade, supplier, consultant or subcontract cost payable...”. 

The Supreme Court held that Grocon had breached its obligations to APN under the contract, because it failed to provide to APN relevant records to enable verification of costs. APN argued that Grocon was only entitled to claim costs ‘actually paid’ by Grocon in completing the project. Grocon appealed on the basis that it was not limited to claiming for costs ‘actually’ paid, but rather it was entitled to costs that were ‘payable’ by Grocon to third parties, and therefore Grocon did not have an obligation to prove that those costs were in fact already paid by Grocon.

The appeal, among other things, disputed the Supreme Court’s interpretation of the term ‘payable’ in the contract between the parties. In the Supreme Court decision, the phrase was interpreted as meaning ‘costs actually paid’, placing high emphasis on the word ‘actual’, rather than taking into consideration the usual meaning of ‘payable’, being ‘costs due to be paid’.   

In the appeal, the Court revisited the rules of contractual interpretation and the construction of commercial contracts, and determined the appeal in favour of Grocon’s interpretation. 

Grocon relied on the High Court case of Woodside [2], which asserts that an objective approach should be adopted when interpreting the rights and liabilities of parties to a commercial contract. That is, applying a business-like interpretation on the assumption that the parties
 intended to produce a commercial result which would avoid the contract making commercial nonsense or creating commercial inconvenience [3].

Whilst Grocon argued that the meaning of the phrase was unambiguous, the mere fact that its interpretation is in dispute argues that its meaning is not clear. In considering the correct interpretation of the phrase, the Court relied on Codelfa [4] which determined that when a phrase or term has multiple possible meanings, courts must look at the objective framework of facts surrounding the circumstances under which the contract was formed together with the parties’ presumed intention in those circumstances, as opposed to the alleged intentions, aspirations or expectations of the parties.

In determining the meaning of the term ‘payable’, the Court looked to another principle of contractual interpretation, being the rule in Dura [5].  In that case, it was determined that parties to a carefully drafted contract are taken to have intended a word to have the same meaning when it is used more than once in the contract [6]. In the Grocon contract, the term ‘payable’ was consistently used to describe amounts that will or may become payable, but are not necessarily required to be paid. Elsewhere in the same contract, the term ‘paid’ was used to describe amounts actually paid and no longer due and owing. The Court confirmed that this was evidence of the intended meaning of the term ‘payable’, given the context in which it was most commonly used throughout the contract, and in line with the 
Dura principle.

It was finally decided that the focus should be shifted from the use of the word ‘actual’ and emphasis was placed on the meaning of the term ‘payable’. The Court decided that the word ‘actual’ simply referred to the amount invoiced or ‘due and owing’ as opposed to an estimated figure, and that regardless of the use of the word ‘actual’, the word ‘payable’ was the key to the interpretation of the phrase. 

The term ‘payable’ defined the entire meaning of the disputed phrase because it implied a legally enforceable obligation to pay (i.e. where payment can be demanded and then sued for if not paid). The Court held that if the parties had intended the phrase to refer to ‘only costs actually paid’, the word ‘paid’ would have been more appropriately used to describe the discharge of that obligation to pay [7].

The lesson

This decision highlights the importance of careful and considered contract drafting in light of the intentions of the parties, and the commercial arrangement which the contract ultimately reflects. 

Certain terms can imply particular obligations on parties, and you should be aware of the implications of language used in drafting contracts.

When drafting and negotiating contracts, the following rules should be applied:

  1. Be clear and consistent. Aim for consistent, clear and unambiguous terminology that plainly reflects the intended meaning of the term or phrase used, rather than trying to be unnecessarily tricky or technical. This includes taking particular care to ensure consistency between related documents; and
  2. Get it right first go. Seek independent legal advice upfront for the drafting and negotiation processes to ensure that the terminology reflects the intentions of the parties in the eyes of the law. This can often help to avoid costly disputes later on.

Authors: Suzy Cairney & Sarah Shirley

Notes:

1. [2015] VSCA 190.

2. Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640.

3. Ibid 656-7 [35].

4. Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352.

5. Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd [2013] VSCA 179.

6. Ibid [26].

7. Christopher Cronis Designs Pty Ltd v Citadin Pty Ltd (1997) 8 BPR 15,659, 15,661.

CONTACT

Brisbane

Troy Lewis, Partner & National Head of Construction and Infrastructure
T: +61 7 3135 0614
E: troy.lewis@holdingredlich.com

Stephen Burton, Partner
T: +61 7 3135 0604
E: stephen.burton@holdingredlich.com

Suzy Cairney, Partner
T: T: +61 7 3135 0684
E: suzy.cairney@holdingredlich.com

Melbourne

 

Stephen Natoli, Partner
T: +61 3 9321 9796
E: stephen.natoli@holdingredlich.com

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Tony Britt, Partner
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E: christine.jones@holdingredlich.com

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