Council CONNECT May 2018 7 Commercial Disputes Tale No. 3 A member of the Bartier Perry Building and Construction team assisted an asphalt contractor who had entered into a contract with a NSW council. Facts An asphalt contractor successfully tendered for and entered into a contract with a council for the supply and laying of asphalt. The contract contained an option clause which stated the agreement was ‘for the period: 1 August 2011 to 31 July 2013 with a further 12 month option available’. In 2012 the contractor carried out asphalt works, which showed signs of failure. The council alleged that the contractor had not complied with the specifications contained in the contract; specifically, that it had not carried out testing for in situ voids, which the council asserted was required under the specifications. Issue On 11 March 2013, Council advised the contractor that it would not exercise the option to extend the contract and that a new tender would be advertised. On 4 April 2013 the contractor gave notice of its exercise of the option to extend the contract for a further 12 months. The council responded by asserting that the option could only be exercised by the council or by mutual agreement. The council invited tenders for the period after 31 July 2013, identifying different specifications to be included in the new contract. The contractor did not participate in the second tender. Action taken The contractor instead brought proceedings against the council in the NSW Supreme Court, seeking damages for breach of the contract. The Supreme Court found that the contractor was, on the proper construction of the contract, able to exercise the option unilaterally and that the council had breached the contract. The contractor was awarded damages for lost profits for the option period and the loss of opportunity to successfully tender for two further contracts with the council. The council was ordered to pay the contractor’s costs of the proceedings. Result The council appealed to the NSW Court of Appeal, arguing that the primary judge’s findings as to construction of the contract were incorrect and that the award of damages was incorrect. The Court dismissed the appeal and held that the primary judge was correct in his construction of the contract, agreeing with his finding that the option clause conferred a unilateral right on the contractor to exercise the option. Payne JA explained that: >  the language ‘12 month option available’ indicated that the extension was offered by the council to the successful tenderer >  the option clause did not qualify the right to exercise the option, whereas several other clauses in the contract did contain qualifications. Why does council need to know this? The decision highlights the need for Council to exercise great care and precision in the drafting of contractual terms. In relation to options to extend the term of the contract, the drafting should be clear and unambiguous as to how and by which party the option is to be exercised, the preconditions to exercise of the option, and the price to apply during the extended option period. As the council learned in this case, the simple wording “option to extend” did not protect its interests and ultimately cost it financially when damages were awarded against it. Council should ensure that option clauses regularly found in contracts, such as for waste collection, should be drafted with precision and clarity and expressly state by which party and in what circumstances the option can be exercised.