1 Interpretation of contracts
A literal interpretation of particular words used in a contract will often lead to an uncommercial outcome that is inconsistent with the likely intention of the parties. There are a number of ways by which a party might seek to persuade the court to construe a contract in a manner different from the most obvious, literal interpretation. These include persuading a court that:
- the words in the contract are capable of more than one meaning, and that another meaning, even if less obvious or less 'literal', is more consistent with the objectively ascertained intention of the parties;
- there is a clear mistake in the language of a contract that can be corrected through the process of interpretation; or
- the obvious, literal interpretation would lead to an absurd outcome.
Interpretation of contracts containing drafting mistakes
In HDI Global Speciality SE v Wonkana No 3 Pty Limited, the NSW Court of Appeal considered exclusions in insurance policies that referred to legislation that had been repealed and replaced. In the absence of any plausible reason why the exclusion should refer to repealed legislation, the court considered different arguments in favour of a more purposive interpretation of the exclusion (so that it would be understood as referring to the replacement legislation). In particular, the insurer argued that:
- the reference to the repealed legislation was a mistake, which, as a matter of interpretation, could be read as referring to the new Act; or
- the reference to the old legislation 'and subsequent amendments' could be construed so as to include a replacement Act.
Ultimately, however, the NSW Court of Appeal declined to interpret the relevant words so as to refer to the new legislation. The court did, however, provide a useful discussion of when a court can depart from the literal meaning of the words used.
In two other cases during 2020, appellate courts were persuaded that contracts were affected by a mistake in the drafting. In Pittmore Pty Ltd v Chan, handwritten amendments to one clause were inconsistent with another clause in the contract. The court, through a process of construction, effectively also amended the wording of that other clause. In James Adam Pty Ltd v Fobeza Pty Ltd, however, the court held that, although there was an obvious mistake in the drafting of the contract, it was not clear what was intended by the parties. The court was therefore unable to construe the contract in the manner proposed.
Literal or commercial interpretation?
Courts often prefer a strictly literal approach when construing notice clauses. An example last year was the decision of the Queensland Court of Appeal in Wagners Cement Pty Ltd v Boral Resources (Qld) Pty Limited which was a typical example of a careful, precise analysis of the actual words used in the contract.
The court was more willing to adopt a commercial interpretation in Pilbara Iron Ore Pty Ltd v Ammon. In that case, the court considered an obligation on the party to complete a 'feasibility study', with the contract not containing a definition of the term. Ammon therefore asserted that the contract should imply terms as to the requirements of a feasibility study (including that it be accurate enough to allow Ammon to raise project finance). The court declined to imply terms to this effect. It held, however, that the phrase 'feasibility study', properly construed in context, required a study that would suffice to allow Ammon to raise project finance. However, as Ammon had not put its case in this manner (relying only upon an implied term argument), the matter was sent back to a Warden for final determination.
As a general principle of contract law, a party is not excused from complying with its obligations merely because the other party has failed to comply with their obligations. An exception does arise, however, where the obligations are 'interdependent'. Such interdependency was argued, unsuccessfully, in Kay v Playup Australia Pty Ltd. An interesting extension of the interdependency principle was considered by the NSW Court of Appeal in Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd. In that case, the court held that a franchisee was excused from paying licence fees to the franchisor because of the franchisor's breach of interdependent obligations under a different agreement.
A court might also decline to apply the most natural, literal interpretation of words in a contract if they are inconsistent with other terms it contains. For example, in Macquarie International Health Committee Pty Ltd v Sydney Local Health District, the contract gave the respondent an 'absolute and unfettered discretion' to set a new timetable.
Notwithstanding these clear words, the NSW Court of Appeal held that this discretion was still subject to an express, contractual obligation of good faith (even though the obligation of good faith was stated to be 'without limiting the generality of any other provision of this deed'). The court found, however, that there was not, in fact, any breach of a duty to act in utmost good faith.
As a general principle of contract law, a party is not excused from complying with its obligations merely because the other party has failed to comply with their obligations. An exception does arise, however, where the obligations are 'interdependent'.
7 Mistakes can also sometimes be corrected by an equitable order for rectification of the contract. Equitable orders are not considered in this Uupdate.
8  NSWCA 296.
9  NSWCA 344.
10  NSWCA 311.
11  QCA 289.
12  WASCA 92.
13  NSWCA 33.
14  NSWCA 234.
15  NSWCA161.
HDI Global Specialty SE v Wonkana No. 3 Pty Ltd  NSWCA 296
Contractual construction – uncommercial literal meaning
In this case, the NSW Court of Appeal considered whether business interruption insurance policies issued by the plaintiffs covered business interruption caused by COVID-19. The relevant policies provided cover for interruption or interference caused by the outbreak of an infectious or contagious disease, but excluded diseases declared 'quarantinable diseases' under the Quarantine Act 1908 (Cth) and subsequent amendments. Before the period of cover for the policies, the Quarantine Act had been repealed and replaced with the Biosecurity Act 2015 (Cth), under which certain diseases could be determined 'listed human diseases'.
The court held that the exclusion did not extend to diseases determined to be a 'listed human disease' under the Biosecurity Act. Accordingly, the insurance policies did not exclude defendants' claims for indemnity for business interruption caused by COVID-19.
This case highlights that courts will not always remedy a mistake in the language of a contract, even where the words are not consistent with the apparent commercial intent.
Too, it highlights the difficulty in interpreting contracts when the literal meaning gives rise to an uncommercial outcome.
The plaintiffs were two insurers who provided business interruption insurance cover to the defendants. The first policy was held by a tourist park for the period 28 February 2020 to 28 February 2021, and the second policy was held by a health store for the period 11 May 2019 to 11 May 2020. Both policies indemnified the insured businesses for business interruption caused by the outbreak of an infectious or contagious disease occurring within a 20-kilometre radius of the respective premises. The policies excluded indemnity for interruption caused by diseases that were 'declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments'.
The Quarantine Act was repealed and replaced on 16 June 2016 with the Biosecurity Act. Under the Quarantine Act, the Governor-General could, by proclamation, declare a disease to be a quarantinable disease. Under the Biosecurity Act, the Commonwealth Director of Human Biosecurity may, by writing, determine that a disease is a listed human disease. On 21 January 2020, the Director of Human Biosecurity determined COVID-19 to be a listed human disease under the Biosecurity Act.
The insured businesses claimed indemnity under the respective policies for business interruption caused by COVID-19. The insurers denied the claims, and sought declarations from the court that the exclusion clause included diseases 'determined to be listed human diseases under the Biosecurity Act'. The insurers argued that the reference to 'and subsequent amendments' should be read to include replacing the Quarantine Act. The insurers also argued that the reference to the Quarantine Act was a mistake because it had been repealed at the time the policies were entered into, and that it was self-evident the parties intended to refer to legislation actually in operation that dealt with quarantinable diseases.
The Court of Appeal, sitting with five judges, held that the literal meaning of the reference to the Quarantine Act 'and subsequent amendments' only referred to amendments to the Quarantine Act and did not refer to the Biosecurity Act as a replacement enactment. In three separate judgments, the court found that, even though the policies referred to legislation that had been repealed at the time the policies were entered into, the literal meaning of the exclusion clause could not be corrected to be read to include the Biosecurity Act.
Chief Justice Bathurst and President Bell observed that the insurers' argument the exclusion clause should be read to include the Biosecurity Act required a departure from the actual words of the contract on their ordinary grammatical meaning. Their Honours held that the principles of contractual construction were not flexible enough to permit the insurers to expand the meaning of the exclusion clause to include reference to the Biosecurity Act
Justices Meagher and Ball held that the language of a contract can be corrected if the literal meaning of the language is absurd or clearly mistaken, and the parties' objective intention is clear. In this case, however, even assuming that the parties made a mistake and had not realised the Quarantine Act had been repealed at the time the policies were entered into, the reference to the repealed Quarantine Act was not absurd and did not reveal an objective intention to refer to the Biosecurity Act.
Justice Hammerschlag considered that, in order to correct the meaning of the exclusion clause, the insurers had to show that the literal meaning of the words was absurd. His Honour recognised that while the reference to the repealed Quarantine Act did not make commercial sense and was likely caused by a mistake, it cannot be assumed that it was a mistake. His Honour found that the literal meaning of the clause was not absurd, as the exclusion clause still operated to exclude the 10 diseases that had been declared quarantinable diseases under the Quarantine Act at the time of its repeal. Accordingly, the court held that COVID-19 was not excluded from the disease benefit clauses, as it was not a disease declared to be a quarantinable disease under the Quarantine Act.
James Adam Pty Ltd v Fobeza Pty Ltd  NSWCA
Construction of contract – mistake – objective intentions of parties – rectification
In this case, the NSW Court of Appeal of the Supreme Court considered whether a purchaser of land in rural NSW had validly rescinded its contract of sale.
The court dismissed the appeal from the vendor and held that, while the terms of the contract were absurd, that absurdity could not be rectified by construction, as it was not self-evident how the mistake should be fixed.
This case reinforces the basic principles underlying the 'rectification by interpretation' of contracts. When attempting to rectify a mistake, the courts will first attempt to correct it through construction. This requires a finding that the literal meaning is absurd or inconsistent and that it is clear what the objective intention is taken to have been. However, while it may be clear that the literal meaning of a contract is absurd, it is difficult to correct a mistake if it is not self-evident how the mistake should be fixed. This is a high bar and may result in one party being able to rescind the contract despite the fact that the contract only contains a small error.
James Adam (vendor) and Fobeza (purchaser) entered into a contract for the sale of rural land that was to be subdivided. 'Lot 101' in the proposed subdivision was to be excluded from the sale. Annexed to the contract was a sketch plan of the proposed subdivision, and clause 39 of the contract stated that completion of the contract was conditional 'upon the registration of the plan of subdivision in accordance with the sketch plan'. The sketch plan incorrectly stated the area of Lot 101 as 2001m2 when it was actually 2205m2. The correct area was included on the plan of the subdivision when it was registered.
James Adam notified Fobeza of the subdivision following registration in accordance with the contract. Fobeza then rescinded the contract in accordance with clause 41, which granted the purchaser the right to rescind if the area of Lot 101 'in the plan of the subdivision as registered is shown on the plan as being 2100 sq. m or more'. The vendor denied the validity of the rescission and served a notice to complete. The purchaser brought proceedings seeking a declaration that it had validly rescinded and the return of its deposit. The vendor sought a declaration that the contract be constructed to read '2310' instead of '2100' in clause 41, as this was what the parties clearly meant. At first instance, the primary judge held that the purchaser had validly rescinded. The vendor appealed.
The court considered three issues.
- The first issue was whether the literal construction of clause 41 was absurd:
- The court held that the construction of clause 41 was absurd or inconsistent, and this satisfied the first requirement that would allow for the contract to be corrected through construction.
- The absurdity or inconsistency flowed from the fact that the sketch plan identified both a precise physical area by dimensions and bearings and an area of 2001m2, the latter being used to derive the area in clause 41 on which the purchaser's right of rescission depended, despite the fact that it was incorrect.
- The vendor's obligation was to register the plan of subdivision in accordance with the sketch plan, but if the vendor complied with this obligation, as it did in this case, the purchaser would inevitably have a right to rescind. There had been a 'clear mistake', as the literal meaning of clause 41 was 'something opposed to reason'. There was no rational basis for imputing such an intention to the parties.
- The second issue was whether, if so, the intended meaning of clause 41 was self-evident:
- As the first condition necessary for the correction of the contract by construction was satisfied, the court had to consider whether a different construction of clause 41 could be upheld.
- On this issue, the court held that even where it is clear there is a mistake in the language of a contract, it cannot be corrected by construction if it is unclear how the absurdity or inconsistency should be resolved.
- Unlike cases where there is a binary choice between constructions, and it is self-evident which is to be taken to have been the parties' objective intention, here there were a number of possible constructions of clause 41, none of which was self-evident. There must be a high level of certainty that certain words should be inserted into a contract and that threshold was not satisfied in this case. Therefore, the contract could not be rectified by construction and the rescission by the purchaser was upheld.
- The vendor argued that the reference to '2100 sq m' in clause 41 was from the incorrect area of 2001m2 found in the sketch plan and in clause 39, to which 5% had been added. The vendor argued that, therefore, clause 41 should be read as '2310' on the basis that this figure was approximately 5% greater than 2205, which was the correct area of the land.
- However, the court held that it was not clear this is what the parties meant and that there was no way of determining what the actual value should be. None of the suggested figures were self-evident. The parties had agreed upon a contractual right of rescission and that right must be capable of being articulated with precision.
- The third issue was the distinction between rectification by construction and rectification in equity:
- President Bell and Justice Macfarlan held that the use of the terms 'rectification by construction' and 'rectification in equity' were confusing and that courts should refrain from using this terminology. The principle behind the concept of 'rectification by construction' is that a contract can be construed, in very limited circumstances, in a way that involves recognition that the drafting of the contract has miscarried. However, this principle does not need to be elevated to the status of doctrine, as that would undermine the importance of courts adhering to the language that parties have chosen to use in setting out the nature and scope of their contractual relations.
- Justice Leeming disagreed, and discussed the difference between the doctrines of 'rectification by construction' and 'rectification in equity'. He stated that both correct a demonstrable mistake in a written instrument. However, they remain conceptually distinct. Ordinarily, rectification by construction through ascertainment of the true meaning of a document should be used before a claim for rectification in equity. Rectification in equity turns upon establishing that the document does not reflect the parties' actual intentions, viewed objectively from their words or actions. Rectification by construction does not rely upon evidence of the parties' intentions. Instead, it is necessary to conclude that the literal meaning is absurd or inconsistent and that it is clear what the objective intention is to be taken to have been.
Pilbara Iron Ore Pty Ltd v Ammon  WASCA 92
Interpretation of express terms of commercial joint venture contract – implied terms of fact
In this case, the Western Australian Court of Appeal considered the process of interpreting a commercial joint venture agreement, where a key term of the contract was undefined and one of the parties alleged a number of implied terms to give meaning to that key term.
The court held that before a court can find implied terms of a contract, it must first consider the proper interpretation of the express terms of the contract. In this case, the court found the alleged implied terms were not part of the contract following the proper interpretation of the express terms of the contract in light of the commercial context of the joint venture agreement.
This case reinforces that courts are reluctant to imply terms into a contract, and will only do so where those terms are certain and necessary. Accordingly, parties to a contract should not expect to rely on implied terms of a contract and attention to detail must be given to the express terms. The case also highlights the importance of the commercial context of a contract, and that courts place great importance on ensuring that ambiguous terms of a commercial contract are given a businesslike meaning.
Derek Ammon was the holder of an exploration licence under the Mining Act 1978 (WA). Pilbara and Ammon entered into a joint venture agreement to explore and, if feasible, mine minerals covered by the exploration licence.
The joint venture was structured so that Pilbara would earn an 80% interest in the joint venture if it completed a feasibility study by a specified time. If it did not, it would be deemed to have withdrawn from the joint venture. The joint venture did not specify the content of the feasibility study.
Pilbara completed a feasibility study and lodged a transfer for an 80% interest in the joint venture with the Western Australia Department of Industry and Resources. Ammon argued that the report produced by Pilbara did not meet the requirements of the joint venture agreement and was therefore deemed to have withdrawn from the joint venture. Specifically, Ammon claimed that the joint venture agreement contained four implied terms that the feasibility study be:
- accurate enough to allow Ammon to raise project finance;
- independently verified;
- reliable; and
- include any reserve statement required to enable Ammon to seek to raise project finance.
The court, in a unanimous joint decision, interpreted the joint venture agreement with an approach to give a 'businesslike interpretation' of the terms of the contract in order to be 'consistent with the commercial object of the agreement'. The court noted that 'feasibility study' was not defined in the contract, but that it had to be understood in the commercial context of the joint venture agreement. In particular, the feasibility study altered both the parties' economic positions because, once the feasibility study was completed, the parties had a choice of whether or not to proceed with the joint venture.
The court found the feasibility study had to be a report for which the nature, scope and analysis would meet the minimum requirements of financiers to the mining industry to allow the parties to raise project finance. In effect, the court gave a technical, rather than ordinary, meaning to the term 'feasibility study'.
In light of this interpretation of the express terms of the contract, the court found that the alleged implied terms were not a part of the contract. It considered the contract operated efficiently without the alleged implied terms when considered against the technical meaning of 'feasibility study'. Further, the court held that the alleged implied terms were too imprecise and uncertain to 'go without saying'.
The court considered that it was not in a position to determine whether Pilbara's report met the requirements of a feasibility study. Accordingly, it remitted the matter to the mining warden to determine the matter without reference to the alleged implied terms.
An application for special leave to appeal to the High Court in this matter was dismissed with costs.
Kay v Playup Australia Pty Ltd  NSWCA 33
Dependent and independent contractual obligations – whether ‘clear words’ are required to find a relation of independency between obligations– penalty doctrine extends beyond payment of a stipulated sum of money to deprivation of contractual rights; relief against forfeiture – whether doctrine confined to proprietary or possessory rights, as distinct from mere contractual rights
In this case, the New South Wales Court of Appeal considered:
- whether there was a relation of independency between contractual obligations in the absence of 'clear words' to that effect;
- whether the doctrine of relief against forfeiture could be available in circumstances where the subject of the forfeiture was a mere contractual right, as opposed to a proprietary or possessory right; and
- whether the penalty doctrine extends beyond the payment of a stipulated sum of money to the deprivation of contractual rights.
The decision is significant because it:
- rejects the notion that 'clear words' are required in order to make a finding of independency between contractual obligations, instead emphasising that the intention of the parties is paramount;
- extends the penalty doctrine to accrued contractual rights, despite the doctrine's 'standard application' being to the payment of a stipulated sum of money; and
- upholds the traditional view of the doctrine of relief against forfeiture, being that it is confined to proprietary or possessory rights and does not extend to mere contractual rights.
Mr Kay and Playup entered into a contract for the sale and purchase of Mr Kay's 100% shareholding in a company for $1.6 million. Of that sum, $1 million was payable on exchange, with the remaining $600,000 to be paid in 24 monthly instalments following the 22 May 2018 'completion date' stipulated in the contract.
The seller gave a number of warranties regarding the state of the company and agreed to restraints on operating a competing business for three years. Clause 4.3(b) of the contract stipulated that if the buyer was more than seven days late making any of the monthly instalment payments, the warranties and restraints were immediately 'void ab initio' and the total amount of the remaining monthly instalments became payable immediately.
Neither the buyer nor the seller performed any of their completion obligations on the 22 May 2018 'completion date'. The following events then occurred:
- 7 June 2018: the seller performed all but two of his completion obligations. From this date onwards, the parties acted as if completion had occurred.
- 22 June 2018: the first monthly instalment fell due, being one month after the 22 May 2018 'completion date' stipulated in the contract.
- 16 July 2018: the seller performed one of his remaining completion obligations, which was to calculate an adjustment amount that was due to be paid upon completion of the transaction. (The seller's other remaining obligation was to provide the buyer with updated lists of liabilities and debtors, which he did not ultimately comply with.)
- 8 August 2018: as the buyer had not made any monthly instalment payments, the seller served a creditor's statutory demand for the $600,000 total of the monthly instalments minus the adjustment amount.
- 13 August 2018: the buyer began making instalment payments to the seller, but did not pay the full amount of the statutory demand.
- 10 September 2018: the seller commenced winding up proceedings against the buyer.
In order to procure dismissal of the winding up proceedings, the buyer paid the outstanding balance of the monthly instalments. The buyer then commenced proceedings for declaratory relief that the restraints and warranties were not void, contending that:
- Its obligation to pay the monthly instalments was suspended until the seller had agreed to the adjustment amount. As that did not occur until 16 July 2018, its obligation to pay the monthly instalments commenced on 16 August 2018. Given that this was three days after it made its first instalment payment, clause 4.3(b) was not engaged.
- Clause 4.3(b) was void as a penalty.
- Alternatively, if clause 4.3(b) was not a penalty, it should be granted relief against forfeiture.
The buyer succeeded at first instance, with the primary judge agreeing (albeit via different reasoning) that clause 4.3(b) had not been engaged. Had it been necessary, the primary judge would have rejected alternative arguments that clause 4.3(b) was an unenforceable penalty or that relief against forfeiture should be granted. The seller appealed the primary judge's principal finding, with the buyer cross-appealing the judge's findings on the alternative arguments.
In deciding the appeal on the primary judge's principal finding, the court had to determine whether the buyer's obligation to pay the monthly instalments was independent of the seller's obligations to calculate the adjustment amount and provide the updated lists of liabilities and debtors. In doing so, the court held that, on its proper construction, the contract dealt with two distinct concepts that were not to be conflated:
- the 22 May 2018 'completion date' – the date on which the parties were obliged to complete the transaction; and
- 'completion' – the word used by the contract to describe the actual event of completion.
The fact that the parties failed to complete on 22 May 2018 meant that they were in default of their contractual obligations – this did not alter the meaning of the term 'completion date'.
The buyer's obligation to pay the monthly instalments was linked to the 'completion date', whereas the relevant obligations of the seller were linked to the concept of 'completion'. As such, there was no relation of interdependency between the two sets of obligations, and the buyer's obligation to make the monthly instalments had not been suspended by the seller's failure to discharge some of his completion obligations.
Although clause 4.3(b) would have been engaged by the buyer's failure to make the instalment payments on time, the court unanimously held that the clause was an unenforceable penalty as to the warranties and restraints.
Justice Brereton further observed that if clause 4.3(b) was not a penalty, relief against forfeiture would not be available, given that no proprietary or possessory rights had been forfeited. Justices Macfarlan and Simpson declined to express a view on relief against forfeiture, as it was not necessary to resolve the appeal.
The court held that, on proper construction of the contract, the buyer's obligation to pay the monthly instalments was not dependent upon the seller's obligation to calculate an adjustment amount, nor the seller's obligation to deliver updated lists of liabilities and debtors.
The court's ruling is significant in that it rejects the notion that 'clear words' are required in order to make a finding of independency, instead emphasising that the intention of the parties is paramount. The court identified a number of factors that indicated the parties did not intend the two sets of obligations to be dependent upon one another:
- Where interdependency was intended in relation to other obligations in the contract, the contract stipulated this expressly.
- The adjustment amount was to be paid on the actual date of completion, and was not connected to, or paid out of, the monthly instalments (which were triggered by and ran from the 'completion date' stipulated in the contract, not the actual date of completion).
- The doctrine of merger tends against the notion that post-completion obligations would be dependent on obligations to be performed upon completion.
- The seller's obligation to calculate an adjustment amount and ensure that it was paid was not a condition precedent to completion. The seller's failure to tender the adjustment payment might have entitled the buyer to refuse to complete, but the buyer did not do so.
Consequently, the court held that while the buyer was entitled to retain the objectively correct adjustment amount out of the monthly instalments, it was not entitled to treat the obligation to pay the monthly instalments as suspended until the seller had agreed to the adjustment amount.
The court also observed that seller's obligation to provide updated lists of liabilities and debtors was not necessary to give content to any of the seller warranties, as any new liabilities that would have been disclosed in the updated lists were already covered by an indemnity provided by the seller. The court therefore held that there was no relevant connection between the seller's obligation to provide the updated lists and the buyer's obligation to pay the monthly instalments.
The court held that clause 4.3(b) was a penalty insofar as it operated to avoid the seller warranties and restraints, and was thus unenforceable. This finding is significant in that it extends the penalty doctrine to accrued contractual rights, despite the doctrine's 'standard application' being to the payment of a stipulated sum of money.
Although the parties did not dispute that the penalty doctrine could apply to accrued contractual rights, the court nevertheless noted that restricting the doctrine to its standard application would 'elevate form over substance'.
When determining that clause 4.3(b) , in substance, a penalty, the court identified two key factors:
- Restraints and warranties are a fundamental protection of the goodwill of the subject business, so as to ensure that the buyer actually gains the benefit of the business. Avoidance of the restraints and warranties is a severe consequence that is 'out of all proportion' to the seller's legitimate interest in securing the payment of each monthly instalment.
- The clause operated indiscriminately – it applied not only in the case of a total failure to pay, but also in the event of a delay of one day after the grace period in paying the very last monthly instalment.
The court also noted that while clause 4.3(b) was the product of robust negotiation between two properly advised parties of comparable bargaining power, this did not alter the fact the clause was penal in character.
Relief against forfeiture
Justice Brereton further held that if the court was wrong and clause 4.3(b) was not a penalty, relief against forfeiture would not be available as an alternative. This finding is significant in that it upholds the traditional view of the doctrine, being that it is confined to proprietary or possessory rights and does not extend to mere contractual rights.
Justice Brereton made the following observations in response to Justice Edelman's suggestion in Mineralogy Pty Ltd v Sino Iron Pty Ltd (No 6) that the scope of the doctrine could be broadened beyond proprietary rights:
- Although there have been cases that suggested or assumed that relief against forfeiture might be available for a contractual license, these can be distinguished from the facts at hand. The present case deals with a mere contractual or personal right, whereas the licensee in each of the precedent cases held not merely a contractual license but also an equitable interest in land. None of the precedent cases extended the doctrine to a bare licence – relief was only granted where there was some estate or interest in land that equity would protect.
- It is true that a foundational rationale for the doctrine – that it is a constraint on the unconscionable exercise of contractual power – is not tied to the existence of a proprietary right. However, the precedent cases are against the application of the doctrine to merely contractual rights, as distinct from proprietary or possessory rights. Although this may mean that the court's inquiry then becomes what is a 'proprietary' right for the relevant purpose, it is nevertheless an identifiable discriminator of the scope of the doctrine.
- Expanding the scope of the doctrine to all contractual rights and leaving control of its use to judicial discretion would 'offend against the well-recognised need to ensure that equity does not undermine the certainty of the law'.
Although Justice Brereton held that relief against forfeiture was not available for the above reasons, he noted that had the doctrine been applicable, he would have granted relief on discretionary grounds.
1  FCA 825.
Meetfresh Franchising Pty Ltd v Ivanman Pty Ltd  NSWCA 234
Damages for wasted expenditure – interdependent contracts – force majeure
In this case, the NSW Court of Appeal considered whether the loss of a head franchise agreement constituted a force majeure event, whether poor business performance could negate a claim for wasted expenditure, and whether franchise and licence agreements were interdependent such that a party's breach of one agreement prevented its enforcement of the other.
The court held that the loss of the head franchise agreement was not outside the franchiser's reasonable power and control and therefore was not a force majeure event. The court found that poor business performance in the first two years of operation did not establish that expenditure would have been wasted had the contract been fully performed and did not defeat a claim for wasted expenditure. Finally, the court held that the franchise and licence agreements in question were interdependent because they were clearly inextricably linked. The appellant's breach of the franchise agreement excused the respondent from meeting its obligations under the licence agreement.
This case is significant because it examines a typical force majeure clause formulation and damages for wasted expenditure in a common commercial context. Further, it shows that in the doctrine of interdependent contracts, references to another contract, the annexing of documents, interconnected obligations and even the content of recitals can serve as indicators of interdependence.
On 9 July 2015, the first respondent, Ivanman Pty Ltd, contracted to purchase a Meet Fresh franchise business selling traditional Taiwanese desserts, beverages and snacks operating at premises in Burwood. The owner of the Meet Fresh intellectual property, Easy Way Station Co Ltd, granted the right to grant franchises to carry on the business in Australia to Meetfresh Australia Pty Ltd, which in turn granted that right to the appellant, Meetfresh Franchising Pty Ltd. Ivanman obtained from the appellant a franchise agreement and a licence to conduct the business at the premises. Both were due to expire in late 2017.
In January 2016, the appellant required Ivanman to undertake a new fit out of the premises. The appellant represented to Ivanman that:
- it would not renew the franchise and licence agreements unless the fit out was completed; and
- the agreements would not be affected by any termination of the head franchise agreement held by the appellant.
Ivanman completed the fit out at a cost of $119,580 and the parties entered into the second franchise agreement for a five-year term.
The first and second franchising agreements contained a force majeure clause, which provided that the appellant was not liable for loss caused by events beyond the appellant's reasonable control.
On 10 January 2017, Ivanman received notice from Easy Way that Meetfresh Australia, and, as a consequence, its sub-franchisees, were no longer entitled to use the Meet Fresh intellectual property. On 27 July 2017, the appellant advised Ivanman that it could no longer use the Meet Fresh intellectual property. The appellant did not offer a renewal or extension of the licence and, on 10 November 2017, served on Ivanman a notice of termination of any 'holding over' licence or franchise agreement.
Ivanman surrendered possession of the premises to the appellant and brought proceedings against the appellant in the District Court. The primary judge found that:
- the first franchise agreement contained the implied terms alleged by Ivanman: in particular, the warranty that Ivanman would be authorised by Easy Way to conduct the franchise throughout the term of the franchise agreement;
- those terms had been breached;
- the force majeure clause did not exempt the appellant from liability because the appellant was in a position of control and power; and
- Ivanman was entitled to recover the amount it spent refitting the premises, on the basis it was wasted expenditure made in the expectation of the benefit of the second franchise agreement for its full term.
The issues on appeal were:
- whether the force majeure clause in the franchise agreements excused the appellant's breaches of contract;
- the quantum of damages; and
- regarding the cross claim, whether the franchise and licence agreements were interdependent such that the appellant was precluded from recovering amounts due under the licence agreement when it did not fulfil its obligations under the franchise agreements.
The court found that rather than qualifying the scope of the appellant's obligation, the force majeure clause operated as an exception to it. This was a matter of construction. The obligations were set out in a broad and relevantly unqualified fashion, and the force majeure clause was included among incidental clauses at the end of the contract. Thus, the appellant bore the onus of demonstrating the applicability of the force majeure clause. The appellant failed to do so because of an absence of evidence to establish how the force majeure event (the loss of the appellant's right to use the intellectual property) came about and the appellant's lack of control to prevent that event.
Damages for wasted expenditure
The court made it plain that Ivanman's claim was not for loss of profits amounting to expectation damages but, rather, for what has been described as wasted expenditure or reliance damages. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64;  HCA 54 established that for such a claim:
- the law assumes a plaintiff would at least have recovered their expenditure had the contract been fully performed;
- the onus of proof rests on the defendant to establish that the reliance expenditure would have been wasted even if the contract had been performed (in this case, over the course of the first and second franchise agreements); and
- the court may award reliance damages where the evidence does not establish any loss of profits.
To establish that the expenditure would have been wasted in any case, the appellant sought to rely on the poor performance of the business over the first two years of its operation. The court found this was insufficient to discharge the appellant's onus. Ivanman's decision to seek a second franchise agreement indicated it had reasonably anticipated it would cover its costs or make profits in the future. Expert evidence also projected Ivanman would earn substantial profits from the beginning of the second franchise term.
The appellant submitted that Ivanman did not incur the costs of the refit as a result of the appellant's breach of contract, but because it was obliged under the franchise agreement to refurbish the premises at its own expense when the appellant reasonably required it to do so. The court held the appellant had not established its request was reasonable for the purposes of the clause, most notably because only five months of the first two-year term had expired.
By its cross claim, the appellant sought $41,575 for licence fees and other monies payable under the licence agreement after its expiry in August 2017. The appellant alleged the agreement had continued on a month-to-month basis. The court agreed with the primary judge that the franchise and licence agreements were interdependent. The court held that the agreements were inextricably linked because:
- the premises were licenced to Ivanman for the sole purpose of carrying on the franchise business there;
- the franchise agreements provided that Ivanman was to licence the premises from the appellant and conduct the business from the premises; and
- the licence agreement referred to the franchise agreement in its recitals and annexed the appellant's lease under which the permitted use was specified to be 'Taiwanese dessert house.'
The appellant's failure to comply with the franchise agreements therefore excused Ivanman from meeting its obligations under the licence agreement.
Other than a small reduction in damages owing to a concession given by Ivanman, the primary judgment was upheld.
Macquarie International Health Clinic Pty Ltd v Sydney Local Health District  NSWCA 161
Default of obligations – breach of contract – right to terminate
In this case, the NSW Court of Appeal of the Supreme Court considered whether the termination of an agreement to build a hospital was valid.
The court held that various notices of default and notices of termination were validly issued and that the termination of the agreement was valid.
This case reinforces the basic principles underlying the construction and interpretation of contracts. When interpreting a contract, the court will always look at the reasonable meaning of the text and the surrounding commercial circumstances. When considering whether a party to a contract has been given a reasonable time to remedy a default, the actual time given to remedy the default will be considered.
In 1996, Macquarie International Health Clinic Pty Ltd entered into an agreement with Sydney Local Health District to construct and lease a private hospital and related facilities. The agreement gave SLHD the power to grant an extension of time for particular activities involved in the development if there was a delay. Macquarie had several obligations under the agreement, including to lodge all required applications with the council in relation to the development.
Plans for the hospital were lodged with a development application and a building application in 1997. In 2000, SLHD tried to terminate the agreement, a move the Court of Appeal found to be invalid in 2010. Macquarie regained possession of the site in 2015. In 2015, SLHD proposed an extension of time due to the delay and warned Macquarie not to propose a different development than it had been contracted to build. SLHD told Macquarie that it was obliged to make a further application for a construction certificate. Without SLHD's knowledge, Macquarie submitted a different proposal than agreed.
In February 2017, SLHD served notices of default on Macquarie regarding the agreement. In August 2017, SLHD terminated the agreement. Macquarie challenged the validity of the notices and the termination. At first instance, the court held that the notices and termination of the agreement were valid. Macquarie appealed this decision to the Court of Appeal.
The court considered three issues.
- The first issue was whether Macquarie was in default of its obligations under the agreement at the time the notices of default were issued;
- This required an examination of what the agreement required and was a matter of construction. It is well established that the meaning of the terms of a commercial contract are to be determined by what a reasonable businessperson would have understood those terms to mean. It requires consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purposes to be secured by the contract;
- Under the agreement, it was an essential term that Macquarie was required to lodge a building application that was consistent with the initial development plans;
- Macquarie initially lodged a building application that had expired. Due to the delays in construction between 1998 and 2016, it became necessary to lodge a fresh application to gain further approval. The agreement allowed SLHD to extend its timetable and to provide for a new date by which Macquarie had to obtain a construction certificate. The court held that the discretion was subject to the good faith obligation set out in the agreement, notwithstanding that the power was granted to SLHD in its 'absolute and unfettered discretion'. SLHD used this discretion in good faith as there is nothing unreasonable about requiring Macquarie to comply with a milestone as an essential term;
- Macquarie then lodged a building application that differed from the Development Application and did not propose to build the hospital in the way that was originally agreed upon. This was a breach of the agreement and meant Macquarie was in default of its obligations.
- The second issue was whether non-compliance with the notice of default meant SLHD lost the right to terminate the agreement;
- Section 129 of the Conveyancing Act 1919 (NSW) requires that notices of default that will terminate a lease specify the particular breach that needs to be rectified and what needs to be done to remedy the breach, as well as provide a reasonable time within which to remedy the default;
- In this case, the notice of default specified which clause of the agreement had been breached and the required remedy, which was that a construction certificate needed to be lodged by a certain date. Macquarie was aware of what was required to go on this certificate. The court held that this was sufficiently specific;
- The notice of default only has to state that the tenant has a reasonable time to remedy the default but there is no need to specify a particular amount of time. If the notice does state a time period, this reference can be disregarded if it is not a reasonable time. Termination can only take place after an objectively reasonable time to remedy the default has elapsed;
- In this case, while SLHD had only given Macquarie 28 days to remedy its breach in the notice of default, in reality it did not terminate the agreement for six months after the notice of default was sent. The original 28 days could be disregarded and did not affect the validity of the notices. The court determined that SLHD did give Macquarie a reasonable time to remedy its default;
- As the notices were valid, SLHD therefore validly terminated the agreement based on non-compliance with the notices.
- The third issue was whether there was a breach of the duty of cooperation.
- Macquarie argued that SLHD was breaching its implied duty of cooperation by trying to terminate the agreement as it was bona fide seeking to exercise its rights under the contract;
- The court held that there was no breach of the implied duty to cooperate at the date of termination, as SLHD did not have to consent to the modification of the development plans as that was within its contractual rights.
- An application for leave to appeal to the High Court was dismissed.
Wagners Cement Pty Ltd & Anor v Boral Resources (Qld) Pty Limited & Anor  QCA 289
Contractual interpretation – the doctrines of waiver and election between inconsistent rights
In this case, the Queensland Court of Appeal considered the validity of notices issued by the purchaser of a cement supply contract showing that it could buy cement elsewhere at a lower price (and requesting the supplier match that price). This in turn required consideration of whether the contract had been validly suspended by the supplier, in which case the purchaser was not liable for payment under take-or-pay provisions.
The court held that upon the proper construction of the contract, the contract was not validly suspended at the time the purchaser issued its notice (but was later suspended when a subsequent notice, which did fulfil the contractual requirements, was submitted).
This case is a reminder of the need to ensure compliance with requirements for notices in contracts. It also affirms that the doctrine of election between inconsistent rights does not apply to parties who rely only on the absence of a legal right in another party.
In a contract dated 8 December 2011, Wagners Cement Pty Ltd sold cement to Boral Resources (Qld) Pty Ltd. Under the contract, Boral was required to purchase a minimum quantity of cement from Wagners annually. If Wagners could not supply all of the cement required by Boral, the contract allowed this quantity to be adjusted downwards. If Boral did not purchase the required minimum quantity, clause 8 of the contract required Wagners to notify Boral of the shortfall and for Boral to pay for that shortfall in order to meet its take-or-pay obligations for the year.
Boral was required to pay a set price for the cement, subject to:
- annual adjustments (eg CPI) during the term of the contract; and
- a contractual price adjustment mechanism in clause 7, which enabled Boral to pay a lower price if it issued a 'pricing notice' to Wagners. This notice required Boral to provide market pricing evidence (ie a bona fide offer or quotation by another supplier) that the price payable for a particular cement product was lower than the price in the contract. Upon issuing this notice, Wagners could then either reduce the cost of the product to that lower competing price or elect to suspend its supply of cement (as well as Boral's obligations to pay) if it disputed the notice. If the supply was suspended, Boral had to resume purchasing from Wagners if it ceased to be able to (or chose not to) procure the cement from a third party supplier at the price specified in the notice.
The timeline of events unfolded as follows:
- 1 March 2019: Boral gave Wagners a pricing notice under clause 7, which included a quotation from Cement Australia for the supply of cement at a specified price over an eight-month period (from 1 May to 31 December 2019) that was lower than the price in the contract.
- 18 March 2019: Wagners gave notice to Boral of its suspension of supply.
- 26 March 2019: Boral and Cement Australia entered into a contract under which Cement Australia agreed to supply cement to Boral over a nine-month period based on the price specified in Boral's pricing notice to Wagners. Boral then proceeded to purchase those products from Cement Australia and acquired further products from two other suppliers.
- 1 April 2019: Boral issued Wagners with a second pricing notice attaching the agreement with Cement Australia, providing for a set price over a nine-month period (from 1 April to 31 December 2019).
- 1 May 2019: Wagners again gave notice to Boral of its suspension of supply.
- 2 October 2019: Boral sent a third pricing notice to Wagners attaching a further contract with Cement Australia under which the parties had agreed to an extension of the original agreement at a new price. Wagners disputed the validity of this notice but did not issue any notice purporting to suspend supply.
Justice Bond, the trial judge, held:
- Boral's March pricing notice was invalid because the quotation did not suggest that the lower price was applicable as at the date of the notice (as was required by clause 7). However, Wagners' March suspension notice was a valid notice electing to suspend supply from 18 March 2019 for six months (ending 18 September 2019); and
- Boral's April pricing notice was also invalid because Boral had no contractual power to issue a pricing notice during a suspension period. This also meant that Wagners' May suspension notice was invalid. However, Boral's October pricing notice was effective (as the suspension period has expired in September) and because Wagners had not elected to suspend supply, the price in the new agreement with Cement Australia would apply under the contract with Wagners and Boral.
Justice Bond accepted Boral's argument that even if the March pricing notice was invalid, the March suspension notice was valid and Wagners had waived any invalidity in the pricing notice. Put another way, Wagners should be treated as having made an election between inconsistent rights, and it could not be permitted to submit that its own notice was ineffective.
As the suspension notice was effective in suspending supply (and Boral's obligations to pay), this meant Boral could avoid paying the penalties associated with any yearly shortfalls under the take-or-pay provisions in clause 8 of the contract and Wagners, in turn, would have been unable to recover those costs.
On appeal, Justices Fraser, Philippides and Crow:
- affirmed the trial judge's conclusion that Boral's March pricing notice did not satisfy the contractual requirements under clause 7. The court considered that an essential attribute of the pricing notice was to provide a price at which the cement 'can be purchased' when the notice is given that is lower than the price prevailing under the contract. The court identified that this is consistent with the volatility in market prices catered for by clause 7. The quotation provided by Cement Australia only commenced the offer for supply from May 2019 and hence was not an immediate or 'current' market price at the relevant time. Accordingly, the court found that the pricing notice did not satisfy the contractual requirements under clause 7;
- overturned the trial's judge's conclusion that the March suspension notice was effective to suspend supply. Instead, the court held that the notice was invalid. Boral argued that Wagners was precluded by an election between inconsistent contractual rights from denying that Boral's notice was effective as a pricing notice under clause 7. On this point, the court discussed the elements of and relevant authorities regarding the doctrines of estoppel, waiver and election. Ultimately, the court rejected Boral's argument and found there was no scope for the application of the doctrine of election between inconsistent contractual rights or for the doctrine of waiver. Wagners had no right to waive non-conformity of the pricing notice with the definition of a such a notice in clause 7;
- overturned the trial judge's conclusion that Boral's April pricing notice and Wagners' May suspension notice were ineffective. Instead, the court held that given the March suspension notice was invalid and did not suspend supply, Boral did not serve its April pricing notice during a suspension period. In addition, the pricing notice set out Cement Australia's offer to supply from 1 April 2019 onwards (so it satisfied the requirements that rendered the March pricing notice ineffective). Hence, the April pricing notice and subsequent May suspension notice were deemed valid; and
- agreed with the trial judge's conclusion that Boral's October pricing notice was valid, but for a different reason. While the court found that Wagners' suspension notice created a suspension period from 1 May 2019, the court had to consider whether a pricing notice is ineffective if issued during a suspension period (which the trial judge had decided in the affirmative). In this regard, the court interpreted clause 7 as giving Boral a right to give successive pricing notices 'at any time and from time to time' when it suited, which included during a suspension period.
Interestingly, on the issue of the efficacy of Wagners' March suspension notice, the court considered that Boral may have had a viable claim based on estoppel or a variation of the contract. If Wagners represented that an ineffective notice was effective as a pricing notice under clause 7 and Boral acted upon that representation to its detriment, Wagners may have been precluded from disputing the validity of the pricing notice. Alternatively, the court considered that the parties may have been found to have varied the contract by treating an ineffective notice as though it was effective as a pricing notice when issued. However, neither of these claims were advanced by Boral.
Allens online learning
Our webinars and online courses can provide you with the insights you need to help stay ahead of the complex issues businesses are tackling in a rapidly changing landscape, while helping to fulfil your CPD requirements.
Allens is an independent partnership operating in alliance with Linklaters LLP. © 2021 Allens, Australia