Contractual disputes and practical tips to avoid them

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:

1. Have contracts that are clear and concise. Seek legal review if in doubt.

2. Review contracts to ensure they are relevant and suited to the circumstances and commercial purpose to which they apply.

3. Keep records of discussions and copies of documents regarding any pre-contract negotiations. Confirm positions in writing.

4. Know the contract, its obligations, and the time periods it refers to.

5. Store records so they can be easily located, particularly as employees come and go.

6. When contractual disputes arise, seek early legal advice and representation to avoid communicating a position that may be inconsistent with the relevant legal position.

7. Work with your legal representative to tailor a strategic outcome that provides a satisfactory resolution while minimising costs and lost time.

Author: Nicholas Kallipolitis

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