Failure to review contracts can cost millions…

The case of The State of NSW v UXC Limited [2011] NSWCS 530 demonstrates the need for organisations to play close attention to the minute details in their contracts.  As time is of the essence in most business transactions quite often the contract details frequently get overlooked.  In this instance the State of NSW was awarded $2,594,063.00 in damages and $126,185.14 in interest plus costs because a clause in the Contract schedule remained silent as to the limitation of the amount that could be awarded for lawful termination.

Background

The State of NSW released a Request for Tender (RFT) in 2007 for the replacement of the core computing system for the NSW Registry of Births, Deaths and Marriages unit of the Attorney-Generals’ Department (Plaintiff).  Subsequently, pursuant to the RFT the Plaintiff contracted with UXC Limited (Defendant) in 2008 pursuant to a written contract (Contract).  As a part of the Contract a dispute resolution clause was included that stipulated that all disputes that arose which could not be resolved by negotiation were to be resolved by the appointment of an independent expert chosen by the Plaintiff and Defendant.  A dispute subsequently arose concerning the Plaintiff’s right to terminate the Contract for the Defendant’s breach and the damages for which the Plaintiff was entitled to claim.

The expert determined that the Plaintiff was entitled to terminate the Contract and to recover damages; however the Defendant commenced proceedings based upon the presumption that the dispute resolution clause was unenforceable as clause 9 of schedule 5 of the Contract stipulated that Court proceedings could be pursued only if the amount awarded by the expert exceeds the amount in clause 8 of schedule 5.  No amount was listed in item 8 of schedule 5 which was an oversight when drafting and reviewing the Contract.

The question for the Court was whether the Defendant could bring legal proceedings pursuant to a clause that was based upon on an unknown number, or based upon a number that could be determined by referencing the original RFT.

Submissions by the Plaintiff

• that clause 10 of schedule 5 provides that a party must treat the determination of the expert as final and binding unless there is a right to commence legal proceedings pursuant to clause 9;
• in this case no right is given since clause 9 only pertains to legal proceedings where the amount of damages determined by the expert exceeds the amount in clause 8 of schedule 5; and
• there is no amount stipulated in clause 8 of schedule 5 for the purpose to which clause 9 of schedule 5 could operate.

Submissions by the Defendant

The submissions made on behalf of the Defendant that:

• there was an intention that an amount in item 8 of Schedule 1 for the purposes of clause 9 of Schedule 5 be listed but was overlooked;
• therefore, in those circumstances, the intention was that their agreement that was recorded in the RFT tender response should apply;
• clause 4.12 of part E of the RFT stated that, apart from some specific terms referred to, the terms included in the user guide apply; and
• part B13 of the user guide provides that an expert determination amount are $250,000 for contracts valued at contracts less than $50 million and $1 million for a contract valued at more than $50 million.

Decision

Ball J concluded and found that:

• the parties had an enforceable right to impose a condition that they submit their dispute to arbitration (Scott v Avery [1856] EngR 810);
• the decision of the expert is binding;
• the limit of liability under the Contract was $5 million, therefore the parties did not specify a threshold amount above the amount awarded by the expert, and to which they were entitled to commence Court proceedings;
• the limit of liability of $5 million barred any proceedings for awards less than that amount; and
• clause 9 of schedule 5 has no effect as the parties failed to specify an amount in clause 8 of schedule 5 that would trigger its operation.

Therefore the Defendant was ordered to pay:

• $2,594,063.00 in damages; and
• interest in the amount of $126,185.14 plus costs.

This case is a reminder that careful attention needs to be taken when drafting contracts.  This is especially the case when using standard form contracts as details can be overlooked that could end up being costly.

Although the drafting of contracts can be more time efficient when using standard form contracts the result can be dire.  Quite often contract schedules are overlooked in comparison to the major terms of the contract; however, often contract schedules contain important information that directly relate to how a term of the contract is to be interpreted.  In this case, what could have amounted to a payment of damages in the amount of $250,000 ended up costing millions.

Careful attention to detail in drafting cross-references is critical in making sure that this scenario does not happen to you.

Further information

Dundas Lawyers regularly drafts various different critical contracts.  To ascertain how Dundas Lawyers can assist you, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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