The Port Macquarie- Hastings Council has found out the hard way that an unclear contract clause, which presumably arose from an absence of proper contract drafting and review, didn’t deliver any savings in the long run. The Court of Appeal has reaffirmed that a contractor was entitled to take advantage of a broadly drafted option clause in a contract, leaving the Council with a substantial bill for damages and legal costs.

The facts

The Council had a long standing series of contracts (going back over 12 years) with the contractor to supply and lay asphalt on an exclusive basis for the Council.

A tender was duly completed in 2011 and a contract signed which stated a fixed term for the contract with the option described as nothing more than:

“a future twelve (12) month option available”

A dispute arose as to the quality of contractor’s asphalting works. In March 2013 the Council advised that the option under the contract would not be offered and the contract would be submitted for a new tender process.

The contractor responded in April 2013 by notifying Council that it was exercising the option under the contract to extend term.

The contractor brought a claim for breach of contract, specifically for the loss of profits it was deprived of during the option term while the Council proceeded with a new tender and declined to send any further asphalting works to the contractor. The Council also made various claims concerning the quality of the asphalting works, which are not relevant for the purposes of this note.

Before the Supreme Court at first instance, the trial judge found that the commercial purpose of the option clause in the contract was to be “an inducement to tenderers”and that the contractor had the right to exercise, and had validly exercised, the option.

As a result of this finding, the Council’s refusal to provide the contractor with more work was a breach of contract and the Council was found to have caused damages of approximately $250,000 in lost profits to the contractor. While the Council disputed the expert evidence of the contractor as to loss, the Court preferred that evidence.

The Council promptly appealed the decision.

The Court of Appeal has now rejected the appeal, affirmed the first instance decision of the Supreme Court. The Court has reiterated that an option clause drafted so broadly as to be exercisable by both parties is, in fact, exercisable by both parties.

Not the best moment for the Council.

While a cost orders will not ordinarily be made if the amount claimed in the Supreme Court is <$500,000 (under Rule 42.34 of the Uniform Civil Procedure Rules), the Court of Appeal nevertheless ordered the Council to pay the contractor’s legal costs of the appeal. This costs order joins the first instance order that the Council pay the contractor’s costs of those proceedings.

Takeaway

The construction industry in particular is filled with examples of contracts for substantial monetary sums and with long terms which are signed without a proper legal review being undertaken either at tender or contracting stage.

Whether this aversion to a proper review arises from a fear that contract changes at the tender stage will hurt a tenderer’s change to win a contract or otherwise, poor contract drafting and review by either party can ultimately can end up costing the parties far more than the profits available under the contract to start with.

When it comes to getting contracts right from the start, the old saying “Penny wise, Pound foolish” continues to ring true.