The recent case of Swift v McLeary [2014] NSWCA 52 highlights the importance of understanding the wording of business contracts, and their implication.

In this case Mr Swift and Mr McLeary had carried on an air conditioning and refrigeration business, one of the companies being Teffcog Pty Ltd (Teffcog). Swift and McLeary entered into an agreement whereby Swift’s shares in Teffcog were transferred to McLeary.

The key point of contention in this case resolved around clause 5.9, which basically provided that each would be liable to pay half of any tax liabilities of Teffcog as assessed in relation to years prior to 30 June 2008. It went on to say that McLeary needed to provide Swift with a copy of the ATO assessment and once Swift received this he would be liable to pay one half of the assessment.

The ATO conducted an audit for the year of 30 June 2008, the result of which was not handed down until July 2010. The audit found that Teffcog was liable for additional tax of $1,485,864.

McLeary arranged for the payment of half of this amount, with payment being made by the trustee of his family trust. Smith argued that because McLeary had not personally paid his half, he wasn’t bound to fulfill his promise to

pay the other half because the maxim on equity is that “he who sees equity must do equity”.

The court looked to construe the terms of the agreement. As this was a commercial contract, they were obliged to adopt a businesslike interpretation and pay attention to “the language used by the parties, the commercial circumstances which the document addresses, and the objects which it is intended to secure.”

The court viewed the commercial circumstances and objects sought to be secured as being clear; that the indebtedness for any additional tax which would fall upon Teffcog.

The court then looked at the words “liable for”. The agreement was that each party was to be “liable for” one-half of the “taxation liability”. The court viewed this as recognising that even though McLeary was now the sole owner of Teffcog, he was not “liable for” the whole of the burden.

On this basis, the court viewed clause 5.9 as recognising that it imposed an obligation on Swift to make a payment to the ATO in fulfillment of his promise to be liable for half of the tax debt. However, the agreement did not subject McLeary to the same obligation, acknowledging that he suffered the full financial impact regardless as he was the sole owner of Teffcog.

Therefore, McLeary did not have a contractual duty to pay the ATO so it was not open to Swift to resist payment on the basis that McLeary had not personally paid his half.

This case illustrates how important it is to understand the terms of the contract and how they effect not only your “liability”, but the other parties’ as well.