Australia: Update from the courts: construing contractual obligations

Last Updated: 6 October 2015
Article by Kathryn Howard and Roxanne Burd

Most Read Contributor in Australia, September 2017

This edition of our column looks at the ongoing pattern of courts construing contractual obligations strictly, such that parties are held to the plain language of the bargain that they entered. It is a timely reminder to read carefully, say what you mean and do what you say.

Varying an agreement: relief from its terms or interest obligations or not?

In the December 2014 edition of this column, we reviewed the High Court's important pronouncement on the principles for construing contractual obligations 1. A recent New South Wales Court of Appeal case2provides practical guidance on how the principles are being applied to disputed contractual arrangements.

The case concerns the late completion of settlement under a contract of sale, and whether a subsequent heads of agreement operated to relieve the buyer's obligation to pay interest in the period between the 'completion date' as set out in the contract of sale and the date when actual settlement took place.

The heads of agreement related to the contract of sale, but also went well beyond the contract of sale to address a much wider scope of matters disputed between the parties. The heads of agreement provided, relevantly, that the buyer would attend to settlement upon the receipt of sufficient funds. However, the heads of agreement did not expressly address the issue of interest, which at the time of entry into the heads of agreement had already commenced accruing. The heads of agreement did however state that the contract of sale was not otherwise affected.

At first instance, the trial judge held that the heads of agreement varied the buyer's obligation to pay interest, as receipt of payment under the heads of agreement was held to be a precondition to performance under the contract of sale.

On appeal, the Court applied Woodside and looked closely at the language used by the parties, the surrounding circumstances known by the parties and the commercial purpose or objects of the heads of agreement. The Court closely scrutinised the precise words of the heads of agreement, read in the context of the parties' broader dispute, and distinguished between the distinct use of the words the 'completion date' in the contract of sale and 'settlement' in the heads of agreement. The Court considered that settlement denoted actual completion.

The Court also looked at the legal and practical significance of that construction, which left intact the interest arrangements under the heads of agreement. The Court noted that the parties knew at the time of entry into the heads of agreement that interest had been accruing, and did not expressly abrogate that obligation. Further, the Court observed that a clause that postponed the obligation to settle until after the receipt of funds had been ruled out in the heads of agreement.

In the circumstances therefore, the Court held that the obligation to pay interest was not inconsistent with the terms of the heads of agreement.

What does this mean for you?

The Court will look closely at the language of the contract and will give effect to that language within the context of the surrounding circumstances. While the heads of agreement delayed the timing at which settlement had to occur, it did not operate to relieve the buyer of interest accruing during that period of delay. Further, the Court will refer to the use of language in one document when construing the meaning of words in a related document.

Be deliberate in your choice of words, and conscious that the use of particular words in one contract may inform the meaning of the same words used in a related contract – even where that related contract is wider in scope.

Complying with the terms of a contract: not just a matter of form

The New South Wales Court of Appeal has recently construed a loan contract and deed of guarantee in favour of a guarantor in circumstances where the lender omitted to disclose the limited liability of a co-guarantor 3.

The case concerned a loan agreement in respect of a property development. The loan agreement was guaranteed jointly and severally by six guarantors. Following the borrower's failure to repay the principal and interest by the due date, the lender agreed to vary the arrangement on the condition of additional security and a seventh guarantor.

The original deed of guarantee relevantly allowed for the liability of the guarantors to be extended over the amended loan facility provided that: (a) the lender provided a copy of the new agreement to the guarantors; and (b) the guarantors accepted in writing to extend their guarantee over the new agreement.

The conditions of the new loan facility, executed as part of a deed of variation, included the provision of additional security by way of a first mortgage over an apartment in Noosa and a guarantee given by a seventh guarantor, being the registered proprietor of the Noosa property, which was limited to the sale amount of the Noosa property. This limitation on the seventh guarantor's liability was not recorded in the deed of variation.

The question for the Court of Appeal was whether the respondent guarantor was liable to guarantee the obligations of the borrower under the deed of variation in circumstances where a material term of the new agreement, being the limited liability of the seventh guarantor, was omitted.

The Court of Appeal's reasoning

In determining the guarantor's liability under the deed of variation, the Court of Appeal considered whether the lender had discharged its obligations as set out in the deed of guarantee to extend the guarantors' liability over the varied loan facility.

While the lender provided to the guarantors the deed of variation that identified the additional guarantor and the additional security, the deed did not record the term that the additional guarantor's liability was limited. The respondent guarantor was not a party to the negotiations in respect of the amended loan facility and was not aware of the additional guarantor's limited liability at the time that he executed the deed of variation. Further, the respondent guarantor gave evidence that he would not have signed the deed of variation if he knew that the seventh guarantor's liability was limited.

The Court of Appeal held that while the respondent guarantor executed the deed of variation, he was not liable as guarantor in respect of the amended loan facility. In reaching this conclusion, the Court noted that the deed of variation did not record all of the terms of the proposed new agreement, namely that the additional guarantor's liability was limited to the sale price of the Noosa property. In the circumstances, the respondent guarantor had not provided written acceptance of the amended loan facility as was required under the original guarantee.

The Court also found that the omission to disclose the limitation of the additional guarantor's liability was misleading and deceptive. However, because the Court held that the respondent guarantor was not liable in respect of the amended loan facility, there was no loss or damage in respect of which to obtain relief.

What does this mean for you?

This case highlights the importance of complying with the original terms of a contract when seeking to extend or vary the obligations under that contract. The Court found, quite simply, that the borrower's conduct did not fall within the express terms of the original guarantee, as a key term of the new facility had not been disclosed (namely, the limitation on liability). Accordingly, the guarantor was not liable.


1 Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7

2 Arida v Arida [2015] NSWCA 170

3 Adisan Pty Ltd v Irwin [2015] NSWCA 217.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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