Interpretation of commercial contracts in NSW

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The recent decision in Jabbcorp (NSW) Pty Ltd v Strathfield Golf Club [2020] NSWSC 1317 (and on appeal: [2021] NSWCA 154), highlights the importance of pre-contract negotiations and the precision with which parties must ensure their departures, qualifications and exclusions are carefully considered and clearly recorded in the contract to avoid disputes.

Facts

The Builder entered into a design and construct contract (amended AS 4902) with Strathfield Golf Club (Club) for construction works to build a new clubhouse, an access road and associated work for the total price of $23,400,730.

The Builder’s tender was negotiated and revised three times with each revision including several qualifications and reductions to meet the Club’s budget.

There were two key qualifications in the Builder’s scope of work:

  • all works required on the golf course and outside the construction boundary that may be a requirement of the DA consent are excluded; and
  • all utility works required have been allowed for within the construction boundary only, with the exception of the electrical substation.

Ultimately, the Builders’ final tender was accepted with a guaranteed maximum price of $22,250,000.

Over the course of the project, the Builder submitted numerous claims for variations, back charges and progress claims which were rejected by the Club and were the subject of this dispute.

Issue

The main issue before the Court was whether certain works were excluded from the Builder’s scope of work. This required an analysis of the definition of “excluded works” in the contract as well as the meaning of the phrase “construction boundary”.

First Decision

The Builder relied on a narrow interpretation of the words “construction boundary” to say that the boundary was much smaller than what was contended by the Club and that any works outside the boundary were excluded from its scope of work and therefore entitled it to a claim for variation. This interpretation was not based on the contract documents, but the Builder relied on pre-tender negotiations, which were not included in the contract.

In rejecting the Builder’s submissions, the Court relied on the following legal principles of contract interpretation:

  1. the starting point for contractual interpretation is that each clause in the contract is read in the context of the contract as a whole;
  2. it is necessary to ask what a reasonable businessperson would have understood those terms to mean;
  3. ordinarily, reference to the contract alone is sufficient, however, sometimes, reference to events, circumstances and things external to the contract is necessary to identify the commercial purpose and the proper construction where there is “constructional choice”;
  4. ambiguity is not a precondition to consideration of external circumstances in NSW. Evidence of the parties’ statements and actions reflecting their actual intentions and expectations is inadmissible;
  5. negotiations between the parties are not relevant to the correct construction of the contract, except to the extent that they shed light on the objective facts known to both parties; and
  6. post contractual conduct is not admissible to interpret the words of a written contract, however, subsequent conduct may be relevant in other ways, such as where it amounts to an admission in a question of fact.

On examining these principles, the Court concluded that no regard was to be had to the pre-tender negotiations and the exclusion was to be read in the context of the contract as a whole. As such, it was clear that the Builder’s scope of work included those works outside the footprint of the clubhouse and access road, particularly by reference to the principal’s project requirements. Therefore, the Builder’s claim for works outside the footprint of the clubhouse and access road, on the basis that they were excluded works, could not be supported.

The Court also considered the effect of the “entire agreement” clause which may modify the general principles. Generally, the purpose of such clauses is to exclude any extrinsic evidence in contractual interpretation, however, it still leaves the possibility of considering extrinsic material where the meaning of the words in the contract cannot be inferred solely from its terms because those terms are ambiguous.

Appeal

On appeal by the Builder, the NSW Court of Appeal re-affirmed the decision of the primary judge.

Take home tips

This decision provides a useful recap about the relevant principles of contractual interpretation and highlights the importance of seeking legal advice at the time of contract negotiation. This can ensure that the final contract properly defines all qualifications, departures and exclusions to avoid costly disputes in relation to variations.

If you are a builder preparing a tender for a project, ensure that you have negotiated the contract to reflect your risk appetite and the scope of work is clearly recorded. If there is any ambiguity as to the scope of work, or the contract generally, this should be discussed and preferably recorded in writing in a document which forms part of the contract.