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Near enough is not good enough in contract drafting

We have been recently acting for a subcontractor negotiating departures to a design and construct for a high-rise office tower in the Sydney CBD.  Grappling with a confusing, inconsistent and untidy subcontract, one of our recommendations was that the contract defined terms should be updated to:

  • remove defined terms that were not used in the operative clauses;
  • define capitalised terms used in the subcontract, but for which no definition was provided;
  • make the defined terms consistent (sometimes two distinct defined terms were used but were intended to have the same meaning); and
  • check and update the contract definitions for changes in law.

The upstream contractor party’s counsel suggested that this work was unnecessary and would make no difference.  We strongly disagreed.

Why did these drafting issues matter?

A significant case for insurers and COVID-19 impacted businesses decided by the NSW Court of Appeal in October 2020 provides an example of how failures to update contracts for law and precisely draft terms (including updating definitions) can lead to real headaches down the line.  The decision has been widely reported in major media outlets due to the multi-billion dollar payouts that may result due to what appears to be a drafting oversight.

In HDI Global Specialty SE v Wonkana No. 3 Pty Ltd [2020] NSWCA 296 (Wonkana), a key test case funded by insurers, the NSWCA was required to decide whether a coverage exclusion applied to claims made by business owners under their insurance policies for interruption to their businesses due to COVID-19.

The exclusion was framed as follows:

‘The cover … does not apply to any circumstances involving ‘Highly Pathogenic Avian Influenza in Humans’ or other diseases declared to be quarantinable diseases under the Australian Quarantine Act 1908 and subsequent amendments.’

The problem for the insurers was that the Quarantine Act 1908 (Cth) (repealed Act) was repealed and replaced prior to COVID-19 by the Biosecurity Act 2015 (Cth) (current Act).  While COVID-19 had been determined a “listed human disease” under the current Act, it had not (and could not) been listed as a “quarantinable disease” under the repealed Act.  It appears that at the time of contract neither party knew about the change in law.

The insurer’s primary argument was that the exclusion clause should be construed as referring to ‘diseases determined to be listed human diseases under the Biosecurity Act 2015 (Cth)’ because:

  1. the current Act constituted a “subsequent amendment” (Subsequent Amendment Argument); or
  2. the references to the repealed Act were obvious mistakes which should be construed as if they were or included references to the current Act (Obvious Mistake Argument).

In summary, the NSWCA held that the exclusion clause could not be construed as referring to the current Act.  This meant that the insured businesses were prima facie entitled to a claim under their policies.

On the Subsequent Amendment Argument, the Court held that the words “and subsequent amendments”, given their natural and ordinary meaning, do not extend to an entirely new enactment[1].  The repealed Act was not a “subsequent amendment” of the current Act.

Looking at the matter objectively (as required by proper principles of contractual interpretation), if the parties intended that the clause capture an alteration to, or replacement of, the repealed Act, drafting to capture this intent would have been used[2].

On the Obvious Mistake Argument, the Court held that it was critical to apply the ordinary principles of construction to the drafting (and natural and ordinary meaning of words) to ascertain the parties’ objective intention[3].

There was no mistake by the parties in drafting which was objectively identifiable to be “corrected” or rectified.  It was not possible to correct the contract merely because the parties incorrectly assumed that the repealed Act was still in force[4].

Key Takeaways

Contracting parties sometimes rely on the words “and subsequent amendments” as an excuse not to update their contracts to deal with changes to law.  This is dangerous because if a law has been repealed and replaced prior to (or during the course of) the contract, there is clearly no guarantee that the replacement statute will apply.  These words are not a “get out of jail free card” to deal with legislative changes.

We caution against the assumption that in the event there is a later argument on interpretation, the departures table, correspondence or other extrinsic evidence will be relied upon to answer the question.  Firstly, this assumes that reliable records of the negotiation will be kept.  Disputes often arise years after the contract is executed and we all know of the knowledge and records vacuum when key personnel move on from a project or employer.  Secondly, the court will only consider extrinsic evidence if the drafting is ambiguous.  On pure questions of contractual interpretation, the court is not concerned with the subjective intentions of the contracting parties, but what the words say to the objective reader.

We strongly recommend:

  • regularly reviewing and updating your contracts for changes in law; and
  • ensuring that simple issues such as errors and inconsistencies in defined terms are taken seriously and corrected prior to execution.

[1] Per Meagher JA and Ball J at [44].

[2] Per Meagher JA and Ball J at [42].

[3] Per Meagher JA and Ball J at [64].

[4] Per Meagher JA and Ball J at [65].

Fitz Jersey under fire: Building Commissioner issues Prohibition Order under new powers

Whilst the Residential Apartment Building (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) was only enacted 6 months ago, the Building Commissioner has shown his commitment to exercising the new powers conferred on his Department to regulate non-compliant developers and protect the interests of buyers in new residential developments.

The RAB Act commenced on 1 September 2020 and introduced a range of measures to regulate the carrying out of residential building work by developers, including:

  1. a new occupation certificate notification scheme; and
  2. the conferral of broad investigatory and enforcement power on the Building Commissioner.

(For more information on the RAB Act generally, please see our article from last year.)

As part of the Building Commissioner’s enforcement powers, on 21 December 2020, a Prohibition Order was issued to property developer, Fitz Jersey Pty Ltd (Fitz Jersey), preventing the issue of an occupation certificate and the registration of a strata plan in relation to its development at 563 Gardeners Road, Mascot NSW 2020.

Pursuant to section 9(1)(c) of the RAB Act, the Building Commissioner can make an order prohibiting the issue of an occupation certificate and/or the registration of a strata plan for a strata scheme in relation to a residential apartment building, if it is satisfied that a serious defect exists in the building. On two separate occasions last year, compliance officers from the Department of Customer Services conducted inspections of the building at Gardeners Road. During these inspections it was observed that building work carried out in relation to the fire safety systems was non-compliant with the performance requirements in the Building Code of Australia, which could result in serious defects.

The issue of a Prohibition Order has serious implications on a developer. Not only does it reflect poorly on their reputation in the industry (a register of Prohibition Orders issued is published publicly on the Fair Trading website), but it also has serious financial consequences as a developer cannot settle on contracts for sale and purchasers cannot lawfully occupy a building without an occupation certificate.

In November 2020, the Building Commissioner issued a Building Work Rectification Order pursuant to section 33 of the RAB Act also in relation to the building’s inadequate and non-compliant fire safety systems.

Residential developers should take heed of this as an example of the Building Commissioner’s willingness to exercise the new powers conferred by the RAB Act.

If you have questions about how the RAB Act may affect your project or would like further information on any of the above, please contact us at info@bradburylegal.com.au or (02) 9248 3450.