In this case, the NSW Supreme Court of Appeal considered whether provisions of a subcontract, which were to be construed by reference to the meanings given to certain terms in the head contract, should be the subject of rectification on the basis that, construed literally, they would lead to a commercially absurd outcome.

Key learnings

A court will only correct the words of a contract where the literal meaning of those words are absurd and the objective intention of the parties is self-evident. The fact that a party’s rights under a contract are to be determined by reference the happening of an event under another contract and that the date of that event cannot be ascertained at the time the first contract is signed will not, of itself, mean that the literal meaning of the relevant provision is absurd.

Case note

Christopher and Cathy Wright and Intercon Engineering Pty Ltd (Subcontractors) entered into four subcontracts with Lend Lease Building Pty Ltd (Lend Lease) in 2009 to perform construction, fit-out and process mechanical works for the Mulwala Redevelopment Project (Project). The terms of the subcontracts were relevantly identical. The head contract for the Project was between Lend Lease as the head contractor and the Commonwealth (Head Contract).

The subcontracts provided for Lend Lease to hold retention money, the second tranche of which was to be released to the Subcontractors on the later of (a) the making good of defects and other matters not in accordance with the Subcontract and (b) the expiration of the Defects Liability Periods and receipt by Lend Lease of a written request from the Subcontractor for release of either a banker's undertaking or money retained. There was no dispute that Lend Lease had received written notice from the Subcontractors requesting the release of retention monies and there were no outstanding defects under the Subcontract.

However:

  • the Defects Liability Period under the subcontracts was defined as commencing on the date of Substantial Completion and expiring on the date “24 months after the Date of Final Acceptance (as defined under the Head Contract)”; and
  • the Date of Final Acceptance under the Head Contract was defined as the date that specified events occurred, including the achievement of Practical Completion and the delivery by the Subcontractor of certain documents to Lend Lease. As at the date of the judgment, the Date of Financial Acceptance had not yet occurred.

Accordingly despite the fact that the Subcontractors had completed all work under the subcontracts, and that there were no outstanding defects under the subcontracts, the retention money under the subcontracts had still not been released to them because the Date of Final Acceptance had not occurred under the Head Contract. The key contention of the Subcontractors’ case was that the definition of Defects Liability Period gave rise to a commercially absurd result, because the Date of Financial Acceptance was not known as at the date the subcontracts were executed, and might never occur. The Subcontractors also made much of the fact that Lend Lease had agreed with its customer to extend the term of the Head Contract substantially without the Subcontractors’ knowledge.

The Court of Appeal disagreed that the literal meaning of the definition gave rise to commercially absurd circumstances and said that:

  • the court will only correct words in a contract where the literal meaning of the contractual term gives rise to an absurdity and the objective intention of the parties is self-evident. In this case, the literal meaning of the definition of Defects Liability Period did not give rise to a commercial absurdity;
  • the commercial purpose of the terms providing for the retention of amounts until the expiry of the Defects Liability Period was so that Lend Lease would not be in a position where it had to release guarantees or retention amounts under its subcontracts before the defects liability period under the Head Contract had expired, and that the parties had chosen to deal with this by tying the Defects Liability Period under the subcontracts to the Date of Final Acceptance under the Head Contract;
  • parties are free to agree in contracts to fix a date by reference to the occurrence of a future event, the date of which is unknown at the time the contract is entered into; and
  • where the terms of a head contract are referred to in a subcontract, the relevant head contract terms are those in effect on the date the subcontract is executed (and therefore, amendments to relevant terms of the Head Contract subsequent to the execution of the subcontracts in this case should be ignored).

This case illustrates the need for subcontractors to consider carefully the commercial operation of any subcontract terms which regulate their rights and liability by reference to the terms of, and events under, the prime contract. While the court will tend to construe references to prime contract terms in a subcontract as being to those in effect on the date the subcontract is executed, this may nevertheless still leave the subcontractor exposed to the happening of events under the prime contract over which it will have little control, if any.

To see the full judgment in this case, please click here.