BUSINESS TIPS: Bad drafting leads to loss of chance damages in tender dispute with local council
The recent NSW Court of Appeal case of Port Macquarie-Hastings Council v Diveva Pty Limited (2017) shows the importance of certainty in contracts, and particularly in relation to loss of chance damages for breach of a contractual right of the contractor to extend, leading to a loss of opportunity in respect of future work.
Facts of the case
In 2005, 2008 and 2011 Diveva successfully tendered and entered into contracts with the Council for the supply and laying of asphalt. The contract contained an option clause which stated the period of the agreement “with a future twelve month option available”.
In 2012, the asphalt works which Diveva undertook showed signs of failure. The Council alleged that the specifications within the contract were not complied with, and therefore they would not be exercising the option to extend. Despite this, Diveva gave notice to the Council themselves exercising the option. The Council asserted that the option clause could only be exercised by the Council or by mutual agreement. Diveva did not participate in any further tenders and was not offered further work by the Council. The parties had different views on who ‘owned’ the option due to the fact that the contract drafting was not clear about this, nor indeed how or when it was to be exercised.
Diveva brought proceedings in the Supreme Court seeking damages for breach of contract. Council raised an interesting argument (which ultimately failed) that, if Diveva were correct in that it owned the option, then there should be an implied term that the option could not be exercised where it was in breach of contract.
The primary judge found in favour of Diveva and that Diveva was, under the contract, able to exercise the option unilaterally. Therefore, the Council had breached the contract. Diveva was awarded $247,443 in damages for lost profits for the option period and for the loss of opportunity to successfully tender for two further contracts with the Council (loss of chance). In addition, the Council was ordered to pay Diveva’s proceeding costs.
The issues raised on appeal were that:
- The decision that Diveva could exercise the option was incorrect;
- The assessment of damages for breach of contract was incorrect; and
- The costs award to Diveva was incorrect.
Decision on appeal
Was the original decision wrong?
To determine the legal meaning of the option clause, ‘the imputed intention of the parties, by reference to the contractual text construed in light of its context and purpose,’ must be identified. It was held that the language repeatedly used in the agreement indicated that the extension was offered by the Council to successful tenderers. The commercial purpose of the option clause was an inducement to tenderers. Therefore the primary judge had not made an error in his construction of the option clause.
Was the damages award wrong?
An innocent party may bring an action for the loss of a commercial advantage or opportunity due to a contract breach. On the balance of probabilities, it must be established that the defendant’s breach caused the loss of opportunity. Diveva lost the opportunity to successfully participate in a future tender, and was held to be compensable as a probable result of the breach of contract. Furthermore, damages are ascertained from the likelihood of success if the opportunity had been pursued. Diveva had an intimate knowledge of the Council’s asphalting requirements, and had the appropriate equipment and business operations to perform the obligations. It was held that but for the breach of contract by Council, there was a strong likelihood that the Council would have entered into further contracts with Diveva.
Was the costs award wrong? The Court also held that the primary judge was correct to award costs to Diveva. The appeal was dismissed.
This case emphasises the dangers of ambiguous, imprecise drafting in contracts and differing interpretations where this is the case. When drafting options it is important to be clear on who they can be exercised by, how they can be exercised, and when they can be exercised, as well as the duration of any option period and the price to apply during that period.
This case is also an important decision in the context of damages for breach of contract, and particularly loss of chance damages in relation to loss of future opportunities with a government tendering entity.
This article is written by Scott Alden and Lauren Stables of Holding Redlich.
Scott Alden, Partner Holding Redlich practices for in both the private and public sector, working on large strategic projects and infrastructure projects, and advises clients in relation to commercial contracts, procurement and probity. Scott has specific expertise in government and commercial law, infrastructure projects, general contractual and legislative advice and the tendering process and commercial contracts of all kinds and sizes and for all industries. As a Metis Course Director, Scott teaches:
- Effective Contract Management Sydney - September 1,
- Contract Law Fundamentals Brisbane - June 26, Melbourne - September 15, Sydney - October 25