Key Takeaways
- Careful contractual drafting and negotiation procedures are vital to ensure that a party’s rights and obligations under a contract are not uncertain and left in suspension.
- In circumstances where words within a contract are ambiguous, the Court has discretion to allow evidence of prior negotiations to establish the background facts surrounding the contract and its subject matter. However, this evidence cannot be used to ascertain any subjective intentions or expectations of a party.
- The agreed removal of a clause or subclause, without making consequential amendments to remove residual references to the deleted clause, can lead to ambiguity in construction of contractual terms.
- A party’s right of recourse to security only arises if there is an amount payable from one party to the other, in circumstances where the due date for that payment has elapsed.
Introduction
The recent judgment delivered by the Queensland Supreme Court in Tomkins Commercial & Industrial Builders Pty Ltd v Pacific Diamond 88 Pty Ltd [2024] QSC 321 reiterates key principles of contractual interpretation, specifically in relation to an amended AS4902-2000 design and construct contract. This decision examines a variety of issues, largely relating to the alleged liability of the Contractor (Tomkins) to pay the Principal (Pacific Diamond) pursuant to multiple parts of the contract. As a result, the applicant (i.e. the Contractor) sought declarations, primarily in respect of certifications that were made by the Superintendent, pursuant to the contract. This case update focuses on the interpretation of a variety of clauses relevant to the effect of the declarations sought.
Background facts
The factual background relating to this decision stems from the contract dated 22 December 2021, between the Principal and the Contractor, as varied by a deed of variation dated 15 August 2022. On 2 October 2024, the Contractor was served with two certificates pursuant to the contract.
- The first certificate (No. 5) certified that $2,600,000.00 in liquidated damages was due and payable from the Contractor to the Principal. This certificate also included that the Principal “may elect to set off” the amount from the amount certified in the progress certificate.
- The second certificate was a progress certificate (No. 32) which was for the amount of $694,343.00 (as payable from the Principal to the Contractor). In this progress certificate, the Principal relied on clauses 34.7 (liquidated damages) and 37.2 (set off) of the contract, therefore certifying that a payment of $1,905,657.00 was due from the Contractor to the Principal.
Contentions
The effect of the two certificates was that the Principal sought to set off the liquidated damages claim against the payment due to the Contractor, thus leading to the balance of $1,905,657.00 being payable by the Contractor.
Further, the Principal on 11 October 2024 gave a notice of intention to the Contractor regarding its recourse to bank guarantees pursuant to the contract as security, to recover the balance.
In response, the Contractor sought declarations that the Principal was not contractually entitled to set off the liquidated damages claim against the payment due, nor could it have recourse to security in these circumstances.
Key Issues
There were two interlinked issues for the Court to consider at trial:
- whether, pursuant to the contract, the Principal had the right to elect to set off the certified liquidated damages against money payable from the Principal to the Contractor as evidenced by the progress certificate; and
- based on the findings of the above, whether the Principal was entitled to recourse to the security provided in the contract to rectify the balance of the amount claimed in the two certificates.
These issues ultimately required the Court to consider the construction of the relevant provisions of the contract.
Decision
The Court agreed with the position of the Contractor, namely that the Principal did not have the right to set off the liquidated damages claim against the progress claim, nor did the Principal, at the relevant time, hold the right of recourse to the security provided for in the contract.
Reasoning
Right to set off
Justice Treston first made reference to clause 37 of the amended AS4902-2000, particularly clause 37.2 which made provision for certificates. In this clause, the contract made provision for one type of certificate only, as follows: “[t]he Superintendent shall… issue to the Principal and the Contractor: (a) a progress certificate evidencing the Superintendent’s opinion of the moneys due from the Principal to the Contractor pursuant to the progress claim and reasons for any difference”. However, the clause also made provision for circumstances where the Contractor does not make a progress claim in accordance with Item 33 of Annexure Part A. In those circumstances “the Superintendent may issue the progress certificate with details of the calculations and shall issue the certificate in paragraph (b)”. On examination of the contract executed between the parties, there was no subclause 37.2(b). There was an additional reference in the contract to a “paragraph (b)”, where the second last paragraph of the clause provided a mechanism for the Principal to pay to the Contractor the certified balance “after setting off such of the certification in paragraph (b) as the Principal elects to set off”. Justice Treston ultimately determined, with reference to a further paragraph where this setting off function produced a negative balance, that money being due from the Contractor to the Principal was possibly the subject matter of deleted paragraph (b).
The Principal relied on clauses 5.2 and 34.7 asserting they preserved the right to set off in the particular way. However, Treston J found these clauses have limited bearing upon the construction of clause 37.2.
As clause 37.2 could not be accurately interpreted, the Court determined the clause was ambiguous, which led to the admission of evidence relative to prior negotiations purely to establish both the background facts mutually understood between the parties and the genesis of the contract. With respect to liquidated damages, this evidence revealed that the parties were previously utilising an AS4300-1995, which made provision for liquidated damages in clause 35.6. This clause had extensive application. However, the parties proceeded to negotiate terms within an AS4902-2000. The liquidated damages clause seen in clause 34.7 of the amended AS4902-2000 was not directly comparable to clause 35.6 in the AS4300-1995. At this time, the parties were in hasty negotiation. Upon receipt of the new version of the contract, the Contractor sent back a table of departures. In this table, no amendments to clause 37.2 were found. Despite this, the next day when the final execution version of the contract was issued, subclause 37.2(b) had been deleted, but all residual references to this subclause remained.
The Principal alleged that the absence of subclause 37.2(b) did not affect the construction of the clause. It also attempted to assert that clause 34.7 created a contractual right to set off. However, the Court did not accept these points, beginning with the fact that clause 34.7 only “identifies the timing which arises in two different circumstances in which liquidated damages might arise”, neither of which provided for payment on demand (unlike clause 35.6 of the AS4300-1995). The Court also considered that clause 37.2, rather than clause 34.7, was the clause that had created the right of set off, though this was no longer its effect due to the deletions made to it.
Alternatively, the Principal attempted to argue that equitable set off remained unaffected by the deletion. However, the Court did not accept this submission, reasoning that the deletion was specific to remove the right to set off, including in equity, until the final certificate stage pursuant to clause 37.4. This ultimate conclusion was reached because the deletion of subclause 37.2(b) removed the only mechanism (aside from that preserved by clause 37.4) where the Principal could claim money owed to it by the Contractor. Therefore, the Contractor was entitled to the declaration, that the Principal did not possess the right to elect to set off against money payable to the Contractor.
Right to recourse to security
Following on from the above finding, the Contractor sought an additional declaration that the Principal had no right of recourse to the security given pursuant to the contract, in respect of the amounts due per the issued certificates. The Court outlined that recourse to security arises in circumstances where there is an amount due, and the due date for this amount has passed. The Principal alleged that the liquidated damages (as evidenced in certificate no. 5) were due and payable, therefore establishing the right to recourse. However, the Court held that there was no immediate right for the Principal to receive liquidated damages. Rather, such right only emerged at the stage of the final certificate in accordance with clause 37.4, providing the only surviving occasion for set off (i.e. serving as the only point at which the liquidated damages could be due, pursuant to this particular contract).
Thus, the Contractor was also entitled to this declaration, that the Principal had no right of recourse to security to satisfy the balance of liquidated damages claimed.
Conclusion
Ultimately, as the two declarations sought by the Contractor were made, the Court made the associated order that the $694,343.00 enclosed in the progress certificate was payable to the Contractor by the Principal, plus interest.
Further implications
There was an additional issue raised, where if the above outcome had not been reached, the Contractor would have put forward further submissions seeking an injunction to prohibit the Principal from exercising its right of recourse to security. The Court gave remarks on this circumstance in obiter, inclining towards the granting of such injunction (hypothetically). In a future Insight, we will examine the reasoning behind this stance and its implications.
Final remarks
This decision highlights the importance of precise contractual drafting, even in circumstances where there is pressure to get deals over the line hastily. This case serves as a prudent reminder to front-end lawyers that, even where there are short timeframes for contractual negotiations, each provision in the contract should be carefully considered. Pragmatically pre-empting the effect that amendment, deletion and failure to make consequential changes (in other words, omitting to amend) could have on the client in their endeavours is a critical element of the drafter’s work. It is this care that will ensure contracts can be performed adequately and that obligations and rights are not left in ambiguity, then requiring a Court to construe terms.
Contact our Commercialisation, Supply and Projects experts for all related concerns with contractual drafting to ensure you readily understand your rights and obligations pursuant to your construction contracts.
