Construction litigation has lessons for CIOs

Construction litigation has lessons for CIOs

What you can learn from a recent legal case between steel company contractors

A recent construction case highlights some key lessons which are relevant to CIOs and their teams when it comes to reviewing, understanding, and enforcing contracts.

The case demonstrates the importance of carefully reviewing technical specifications even when they are buried in schedules. It also highlights the significance of keeping key documents that explain the commercial context of contracts, which will assist your company in any later dispute.

On 6 June, the NSW Court of Appeal handed down its decision in Mainteck Services v Stein Heurtey SA, a dispute between a contractor and subcontractor. The dispute related to the design and installation of a walking beam furnace and associated equipment for a steel company.

There are striking similarities between this contract and an IT agreement. Both involve complex design and construction considerations, including some which cannot easily be foreseen.

There are also parallels in the way people approach these types of contracts, largely because key scope requirements are contained in technical schedules.

This case is significant because the court explained key principles which NSW courts will apply around interpreting contracts, including IT agreements.

This follows a case in the High Court between the Electricity Generation Corporation and Woodside Energy Limited in March. The High Court said that courts will now interpret a contract not only by its wording but also by considering its commercial context.

Before the Woodside Case, courts and lawyers had generally taken the view that evidence of surrounding circumstances could only be received and considered by courts where a contract was ‘ambiguous’. This view was based on comments made by the High Court in a special leave application in a previous case, Western Export Services Inc v Jireh International.

This meant that contracts were interpreted based on the wording of the contract alone unless relevant terms were ambiguous.

During the Mainteck case, Justice Leeming said that in the wake of the Woodside decision, evidence of the commercial context and purpose of contracts will now routinely be considered to construe them in litigation. The other judges who the heard Mainteck case agreed with him.

Leeming J acknowledged that this could expand the scope of litigation (which will of course also affect costs and timing), but emphasised that only limited evidence will generally be admissible.

The admission of evidence of the commercial context and purpose of contracts is important in an IT context. It means that clauses with a particular literal meaning could be found in litigation to have a different legal meaning based on the commercial context.

Key matters of context known to both parties are often identified from communications between them before a contract is signed. The court takes an objective view of the context, and the subjective intention of each party is generally not relevant.

Uncertainty around scope did not make the contract void

In the Mainteck case, the key area of dispute was the scope of the subcontractors' service obligations.

The subcontract, relevantly, said that its areas of responsibility were “laid down in the technical specification of the main contract specifying the scope of supply and services to be performed by each party, and the work program.”

Unfortunately, there was no definition of ‘technical specification’ in the subcontract. There was one in the head contract, but it did not divide the work between the contractor and the subcontractor.

A referee who considered the contract had previously found that uncertainty about the scope was so extreme in this case as to render the subcontract void for uncertainty. A judge at first instance found that the referee was incorrect. The Court of Appeal agreed with the judge.

The court emphasised that courts are very slow to find contracts void for uncertainty. Where possible, courts interpret contracts in a way which preserves their validity, and where necessary, will imply terms to enable the contract to be carried out. This is particularly true when the parties have partly performed the contract.

In this case, the court held that there was a clear intention of each party to enter into a legally binding relationship, which was evidenced by the lengthy and formal document they had created.

In those circumstances, the court accepted the contractor’s arguments that the scope was defined in a pricing schedule to the head contract which was not called a ‘technical specification’.

The schedule had headings which suggested that particular work was allocated to the sub-contractor and that other work (including design) was allocated to the contractor.

The court rejected arguments made by the sub-contractor that scope was defined in a bill of materials that was created after discussions at ‘scope meetings’ between the parties.

The court did not take the scope discussions into account when interpreting the contract because they were too unclear and had taken place long before the parties entered into the main contract.

What are the key lessons?

You may ask what significance all of this has for CIOs and their teams. There are key lessons that can be taken from this decision.

First, be sure to carefully read all of your contracts, including the schedules, which often give rise to problems as they are the least likely to be the subject of detailed review at a senior level.

Second, if key aspects of scope are not determined, consider having a design phase with appropriate mechanisms to address possible disagreement or other problems at that stage.

Third, if you refer to or otherwise incorporate a part of a document in one of your contracts, then attach it or take other steps to make sure that someone without any knowledge of your negotiation will in future be able to tell what is referred to.

Fourth, bear in mind that all your communications relating to contractual negotiations may end up being used as evidence in court and could have a big impact on the meaning given to the contract.

They are also significant in relation to potential misleading or deceptive conduct claims. So, it is wise to keep records of key matters and considerations, including key communications between the parties.

Records of relevant communications are also likely to be admissible in any proceeding (as evidence of the commercial context known to both parties or on another basis). Even material which is not admissible may be helpful in the dispute resolution process.

After each contract is signed, ensure that somebody gathers the materials relating to contract negotiations and that they’re kept in a safe place for as long as there is a possibility of a dispute. That way, your legal team can easily access the information if it is required.

A fifth lesson to be taken from this case is that business common sense should be applied when interpreting contracts. Don't be fooled by arguments based on uncommercial and literal interpretations of words which have a different meaning to you.

In many cases, the IT team with its detailed knowledge of systems and commercial considerations will have the best understanding of the likely meaning of a term in a contract.

Be sure to share your team's thinking with your legal team when seeking advice so that they have the benefit of your specialist knowledge.

Finally, when different interpretations of a contract or other problems emerge, try to resolve them quickly.

Inevitably, the party whose understanding of the contract is found to have been incorrect will find themselves more out of pocket than they would have been if the issues of interpretation had been resolved earlier.

Disagreements are sometimes unavoidable, but by quickly deploying practical measures to resolve them (including escalation processes in the contract), they can usually be resolved.

Sophie Dawson is a partner at legal firm Ashurst and specialises in media and technology advice and disputes.

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Tags Mainteck ServicesAshurstNSW Court of AppealWoodside Energy LimitedStein Heurtey SASophie DawsonElectricity Generation Corporation

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