EXECUTIVE SUMMARY
In the recent Supreme Court case of Tomkins Commercial & Industrial Builders Pty Ltd (Tomkins) v Pacific Diamond 88 Pty Ltd as trustee for the Pacific Diamond 88 Unit Trust (Pacific Diamond) [2024] QSC 321, the Court considered whether Pacific Diamond was entitled to setoff $2.6 million certified as liquidated damages from a the sum of $694,343.00 certified for payment, in circumstances where the contract was ambiguous in respect of its entitlement to setoff.
What happened?
Pacific Diamond engaged Tomkins under an amended AS4902-2000 form of contract. One of the many amendments made to the Australian Standard form contract was the deletion of sub-paragraph (b) within clause 37.2, which ordinarily requires the superintendent to issue a second payment certificate certifying monies owed by the Contractor to the Principal.
While that paragraph was deleted, it was still referenced within the balance of the provisions, creating an ambiguity as to whether amounts could be setoff by the Principal from the amount certified for payment in the certificate issued pursuant to clause 37.2(a).
Treston J said:
- Clause 37.2 did not have a clear meaning, noting that the clause continued to refer to the paragraph that no longer existed meaning that the clause could not be sensibly understood;
- a reasonable businessperson would not have understood or have been able to understand what the parts of the respective clause meant, even having regard to the language used, surrounding circumstances and commercial purpose of the contract.
Her Honour went on to apply the settled principle that where contractual words are ambiguous or susceptible to more than one meaning, evidence of prior negotiations is admissible to establish the background facts that were known to both parties and the subject matter of the contract. In addition, the deleted terms from the standard form contract can also be used as an aid to determine the meaning of an ambiguous term.
In this case, the Court had regard to an email sent during contract negotiations, where the Contractor informed the Principal that did not agree with the Principal being able to recover liquidated damages on demand or deducted from certified payment and security.
Accordingly, the Court held that the proper interpretation of the contract, having regard the extraneous material, prevented Pacific Diamond from setting off liquidated damages against amounts certified for payment.
A notice of appeal has been filed in respect of the judgment.
What do you need to do and how is it important?
Carefully consider whether your contract reflects your intended meaning to prevent ambiguity and costly disputes. Where there is ambiguity, the court may consider prior negotiations, written communication and deleted standard form contractual clauses to objectively derive meaning. Ambiguous contracts increase commercial risks due to the uncertain legal position and resultant protracted disputes.
How HWLE can help you?
If you require a contract for a construction project, HWLE can assist in contractual drafting to avoid unintended consequences and ensure your intentions are clearly captured within the agreement. If you are in a contractual dispute, get in touch and we can provide advice on the best options going forward.
This article was written by Colin Harris, Partner, and Alyce Walker, Solicitor.
