A recent case highlights the danger of a poorly drafted
GST clause. The GST gross up clause in the contract for sale of
land was so poorly drafted that the Court held that the clause was
void for uncertainty and declared that the clause was severable
from the contract.
This was a costly mistake for the vendor who, as a consequence,
is unable to collect a GST gross up payment from the purchaser, and
is left to fund the GST liability arising from the sale of the land
out of its own pocket.
CITYROSE TRADING PTY LTD V NOEL BOOTH AND KAY & BURTON
PTY LTD  VSC 504
In Cityrose Trading Pty Ltd v Noel Booth and Kay &
Burton Pty Ltd  VSC 504, Noel Booth
(Purchaser) bought a residential property from
Cityrose Trading Pty Ltd (Vendor) by a contract of
sale after the property had earlier been passed in at auction.
The Purchaser offered to pay the price of $2,250,000 for the
property and the Vendor accepted the offer. The purchase price
recorded in the Particulars of Sale was accordingly $2,250,000.
However, the contract of sale contained a GST clause and a dispute
later arose between the parties as to whether the GST clause
required the Purchaser to pay an additional amount of $225,000 to
the Vendor on account of GST.
Justice Emerton in the Supreme Court of Victoria identified a
number of weaknesses in the GST clause. First, the clause used
terms that were defined in the GST legislation and purported to
import those definitions into the contract. However, the way in
which those terms were used in the GST clause was inconsistent with
their statutory definitions. Second, parts of the clause seemed to
serve no purpose and were unnecessary. Third, and most importantly,
the GST clause did not assist with the question of whether the
price of $2,250,000 was inclusive or exclusive of GST.
Her Honour held that the GST clause was obscure and meaningless,
and that it was not possible to discern from the clause whether the
parties intended that the purchase price be GST-inclusive or
GST-exclusive. Accordingly, her Honour declared that the clause was
void for uncertainty and severable from the contract.
Although unnecessary, her Honour went on to find that the Vendor
had, in any case, engaged in misleading or deceptive conduct and
that the Purchaser had suffered loss and damage as a result.
Accordingly, the Purchaser would have been entitled to remedies
under the Fair Trading Act 1999 (Vic). The misleading or deceptive
conduct included the late provision of the draft contract of sale
by the Vendor's solicitors to the Purchaser and his solicitors,
giving them little time to properly review the contract. The Court
also considered that the fact that the property was residential
land which does not ordinarily attract GST meant that the Vendor
should have communicated the requirement for a GST gross up payment
to the Purchaser by means more than just the insertion of a GST
clause into the contract.
IMPLICATIONS OF THE DECISION
The decision highlights the importance of clear drafting for GST
in a contract. Poor drafting increases the risk of a dispute later
arising between the parties, and can result in a direct financial
loss to one of the parties.
Please contact a Corrs expert for advice or assistance in
relation to GST and documenting your transaction.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Most awarded firm and Australian deal of
Australasian Legal Business Awards
Employer of Choice for
Equal Opportunity for Women
in the Workplace (EOWA)
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).