The repercussions of a poorly drafted building contract:
The importance of having any written agreement formalised in a contract is highly endorsed in the construction (or any) industry. However, it is important that you understand the process and document all negotiations so that the contract reflects the agreement and protects your rights.
Any unresolved disputes diminish resources and time and has the potential to damage the parties’ relationship and reputation in a contractual dispute. These disputes have an overwhelming effect on the building project and if not resolved, will likely end up in front of a dispute resolution authority or in Court.
The majority of contract dispute cases will rely on the contract between the parties and construe what the contract contains. The words used in the contract will be scrutinized and too often valid arguments are made void due to being poorly drafted and are ambiguous or unclear.
The case of Diveva Pty ltd
In 2011, Diveva entered a contract with the council for Asphalt work. The contract included an option clause which stated, ‘with a future twelve (12) month option available’.
The council claimed that Diveva had failed to comply with certain specifications under the contract and the claim remained unresolved when the council notified Diveva that they would not be exercising the option period and advertised for future works for tenders. Diveva, in reliance with the contract, exercised the option period and did not partake in any tendering process. However, no further contract was entered into and Diveva sued the council was sued for breach of contract.
The council claimed that an option period could only be exercised unilaterally by the council however, the Court ultimately disagreed with this statement. The Court had to determine in whose favour the option worked and as there was no clear term in the contract, they were required to look at the language used throughout the entire contract and determined that the use of the word ‘option’ was a commercial inducement to tenderers.
The Court stated in its judgement:
“..The 2011 agreement conferred an option upon Diveva which it could exercise unilaterally to extend the agreement for a further 12-month period. That conclusion was essentially based on the text of the agreement.’
The court held in Diveva’s favour and they were awarded damages for loss of profits and loss of opportunity.
The council appealed this decision stating that the option clause could only be exercised in the very least by mutual agreement or by the council unilaterally. The appeal was ultimately dismissed and the Court in its judgement stated when interpreting the real meaning of the contract, they rely on the parties’ intent and purpose and the words used.
It was found by the Court that there was as in inference throughout the contract that the council would offer work to successful tenderers. The use of the words ‘available’ and ‘option’ throughout the contract and tender request deemed the option capable of being exercised unilaterally by Diveva. It was further notes that the allegations of Diveva’s breach did not preclude them from validly exercising the option period. Despite the disputed works, the Court considered that there was a strong prospect that the option would have been exercised, given the parties track record, previous dealings, and knowledge of the Council’s further work.
Things to remember
As the option clause did not stipulate the parties respective right to exercise, the court was required to ascertain the true meaning on the contract by analysing the language and intent of the parties. This could have been avoided if the contract were drafted in a manner that was clear and unambiguous by stating how the option clause could be exercised.
Poorly drafted contracts can have detrimental results and adversely affect the subsequent building projects. It is important that the contract is drafted in a way that cannot be misconstrued, and that you are aware of your rights and obligations are. Please contact Carter O’Neill Legal today on (02) 4308 8892 or firstname.lastname@example.org.(?)