The pricing and payment clauses are one of the more important and potentially contentious parts of any contract.
The recent case of RMI Pty Limited v Spray Coupe Pty Ltd  QCA 37 (the Decision) provides a timely reminder of the importance of ensuring the price and payment clauses in any contract are clear and understood by all.
The facts of this case are briefly set out below, but the key learnings from the Decision are:
- Precise, careful drafting that properly captures the common intention is essential;
- Test key clauses against factual scenarios to see if the provision operate as intended;
- Care must be taken when incorporating pre-contract documents and letters, particularly where there may be inconsistency between them and the standard terms being used;
- A legal dispute can destroy a long-lasting commercial and/or personal relationship; and
- Courts will, where appropriate, objectively construe contracts as a whole, and will likely take into account background facts and industry conditions to formulate a view regarding a party’s intention.
The appellant (RMI) is a cotton grower and engaged the respondent (Spray Coupe) to deliver pesticide and spray management to RMI between 1996 and December 2019, a long-term commercial relationship of around 25 years.
In April 2016, RMI considered that Spray Coupe needed to modernise its equipment. Spray Coupe could only afford to purchase new equipment if it had certainty of future income. Accordingly, RMI prepared a pre-contract letter for the purpose of Spray Coupe obtaining a loan for the required equipment (Letter). The parties entered into a five-year contract to provide spraying services to RMI which incorporated the Letter as a special condition, being clause 8 of the contract.
The Letter stated that:
“a monthly retainer of $40,000 to Spray Coupe Pty Ltd in advance against their monthly spraying charges, for services supplied during the month.” (emphasis added).
Clause 8 had similar wording but with an additional comma as follows:
“RMI Pty Ltd will pay Spray Coupe Pty Ltd a monthly retainer of $40,000, in advance against their monthly spraying charges, for services supplied during the month”.
A dispute arose regarding whether Spray Coupe is to be paid a retainer $40,000 per month, irrespective of whether they provided Spraying services to a lesser value, or whether the payment was to be on account of services in that month and if there is part of the retainer unused, it is to be credited against future months’ spraying.
The value of the dispute was $329,986.65.
The primary judge held that the proper construction of clause 8 was that the $40,000 monthly payment was to be offset against the monthly spraying charges in that month, but that Spray Coupe retained the excess if there was any.
On appeal, the judge considered and applied the rules (from common law precedents) regarding contract interpretation.
His Honour stated that commercial contracts must be construed objectively, fairly and as a whole.
The appeal judge overturned the first instance decision and it was held that the $40,000 monthly ‘retainer’ was to “offset” against charges for spraying services in the then current month, but that any unspent excess is to be applied and set-off against future months’ spraying.
The judge’s reasoning for this was:
- Ordinary meaning of ‘retainer’ and ‘against’: The Court of Appeal construed clause 8 by deliberating the dictionary meaning of ‘retainer’, meaning “a fee paid to secure services“. This meant that the $40,000 retainer payment was agreed to be paid to ensure Spray Coupe was simply available to supply spraying services and it did not matter whether spraying services were actually supplied in that month or not. Additionally, His Honour considered the dictionary meaning of ‘against’ meaning “in exchange for, in return for“. This meant that the $40,000 monthly payment was to offset the actual charges for spraying services rendered in the months subsequent to that payment.
- Other considerations – background facts: The Court of Appeal also considered mutually understood background facts. After a commercial relationship of 25 odd years, it was known to both parties that RMI’s requirements for spraying services were not consistent month-to-month, but were contingent on seasonal and weather conditions, as well as the type of crops planted. This meant that no services would be required for some months and the parties would have known this. It would not make sense commercially for RMI to remit $40,000 to Spray Coupe for a month where no services were provided and for Spray Coupe to retain that $40,000 and then remit another $40,000 the month after. Therefore, the Court determined that the parties must have intended for the words “monthly spraying charges” to have meant actual charges levied for spraying services, and that the $40,000 monthly payment would accumulate over the life of the contract.
- Punctuation – the use of a comma: As stated earlier, the wording of clause 8 is similar to the extract from the Letter, however the effect is relevantly different. That is because of the intentional use of the comma before and after the phrase “in advance against their monthly spraying charges” which separates that part from the balance of the clause. Therefore, read without the phrase, clause 8 provides “a monthly retainer of $40,000 for services supplied during the month” which meant, on its face, that a retainer of $40,000 will be paid each month for services supplied in that month.
This case is a useful reminder of:
- The importance to take care when drafting, particularly if you are dealing with specific payment clauses that may provide for unusual payment arrangements;
- Being careful when including external letters or documents by reference, to link to important clauses such as payment; and
- The negative impact a dispute, caused by an ambiguous clause, can have on long term harmonious commercial arrangements.
This article was written by Scott Alden, Partner and Nathan Nguyen, Law Graduate.