In 2013 there were a series of GST cases which showed that drafting of GST clauses goes wrong and clients suffered unintended outcomes.
It seems that 2014 is going to continue along the same lines with a recent New South Wales case involving a vendor “misunderstanding” the operation of the GST clause in the standard Real Estate Institute of New South Wales contract.
So what went wrong for this vendor?
The parties entered into a contract for the sale of a parcel of land and used the standard Real Estate Institute of New South Wales contract to document the transaction.
The parties disagreed on whether or not the purchase price included the vendor’s liability for GST or whether GST was payable in addition to the purchase price specified.
There were some negotiations regarding the GST position for the supply and the contract was eventually exchanged on 6 June 2013. When settlement drew nearer, a draft tax invoice was provided which was for the purchase price plus GST and a dispute arose between the parties, including the suggestion by the vendor’s solicitor that the parties did not intend to be contractually bound by the contract by the vendor’s solicitor. The vendor’s solicitor also asserted that there was no agreement on the sale price and therefore no contract between the parties
Was there a binding contract?
The court looked as whether there was a consensus between the parties as to the purchase price, which was an essential term of the contract.
The fact that parties exchange contracts is the “clearest indication that the parties intend to be bound by the terms of the contracts exchanged”. The court held that it was clear that for some time after exchange occurred, the parties considered themselves to be contractually bound.
The parties did, however, differ as to their understanding as to the effect of the terms of the contract but this did not change the fact that there was a consensus about the contractual terms.
The court rejected the argument by the vendor that there was no binding contract as a result of there being no consensus as to the terms of the contract.
Could the vendor rescind the contract?
It was clear to the court that for some time the vendor did labour under a mistake as to the effect of the contractual terms of the contract. What wasn’t clear was whether the purchaser was of the view that the vendor continued to labour under the mistake up to the time that the contracts were exchanged.
The court questioned whether the purchaser had played any part in the vendor’s mistaken understanding and the continuing misunderstanding. The court noted that the purchaser’s solicitor had pointed out in correspondence to the vendor’s solicitor what the purchaser contended to be the proper construction of the contract. The vendor proceeded with the contract despite this contention.
The purchaser’s solicitor also invited the vendor to amend the contract in the context of the purchaser contending what was its interpretation of the contract. The vendor did not amend the contract.
Lastly, the purchaser made it clear that the price that it was willing to pay was $700,000 including GST and that was what it would pay if the contracts that were currently being negotiated were exchanged. The vendor proceeded without making any amendments to the contracts.
In light of these facts the court held that the contract could not be rescinded by the vendor by reason of the vendor’s mistake.
What can you do to help your clients avoid being out of pocket for GST liabilities?
When advising a client on the GST implications of a supply or if you are negotiating or preparing a contract for a client it is important that:
- all supplies are identified – contracts may involve supplies on the part of one or more parties so it is not safe to assume that there is only one supply that might be subject to GST also, identify any mixed supplies;
- if there are multiple supplies, suppliers and recipients, that the GST position for each of these supplies is considered – this avoids unexpected financial consequences for a party;
- be aware of the consequences and effect of standard GST clauses in property contracts and consider whether bespoke GST special conditions are required – if bespoke special conditions are required, ensure that the standard conditions are adequately dealt with in the special condition (i.e. by specific deletion);
- resolve GST issues up front and clarify/confirm the understanding as to the GST position for the supply;
- GST clauses are drafted in a manner which enables a vendor or supplier to recoup GST from a purchaser or recipient; and
- your client’s position is covered where reimbursement of GST is contemplated.