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Construction litigation has lessons for CIOs

Sophie Dawson | July 1, 2014
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.

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 was in relation 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 upon 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.

 

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