All too often we are instructed to advise on contract disputes where the contract has not been administered in accordance with its terms. Parties depart from the prescribed processes in a contract for a variety of reasons including:

  • not being familiar with the contract and not understanding it
  • (bad) habits, e.g. 'bottom drawer' approach to administration
  • necessity, where say a contract is not suitable (e.g. using a services contract to procure supply of goods) or parties' needs change.

It can be difficult to explain to a client that, despite experiencing losses at the hands of the other party, their prospects of recovery are reduced due to the way the contract has been administered. The same works in reverse in defending a claim by the other party. It is even more challenging to explain that the client is in that position because those charged with the responsibility of making sure the contract was followed by the client, didn't do so, whether that be due to ignorance or negligence.

Putting to one side, departure from the contract terms due to ignorance or negligence, the length of many engagements can lead to a situation where both parties recognise that the terms agreed to might not suit the parties. It can be the case that both parties' interests are best served by adopting something different to what is prescribed in the contract. Where the circumstances the parties find themselves in mean that it is necessary and/or more convenient to do something different, there is a much better way to effect the desired change than to make something up. Whilst parties are generally clear on the necessity for formality in agreeing a change in what is being supplied or the price to be paid, a change in process or acceptable thresholds seems to attract less attention.

The recent Supreme Court of NSW decision in H&M Constructions (NSW) Pty Ltd v Golden Rain Development Pty Ltd (No 4) [2023] NSWSC 925 is a good reminder of the importance of being familiar with the agreed terms and following them in any contract.

In this case,the superintendent created something not contemplated by the contract. Whilst the legal effect of this is simple – the invention, a conditional certificate of practical completion, had no legal effect, this is clearly not what either party thought was happening, creating fertile grounds for dispute. What is clear from the outcome is that if parties are going to change an important threshold mechanism, they are best to formally amend the contract. This ameliorates the risk that a party walks back from the agreement to adopt a different approach or that there is a misunderstanding as to what is agreed.

Whilst it may seem like a formal deed of variation, especially at the end of a project, introduces undesirable cost and delay, those inconveniences are likely to be minor compared to the legal costs spent in litigation.

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.