The recent case of Siemens Gamesa Renewable Energy Pty Ltd (SGRE) v Bulgana Wind Farm Pty Ltd (BWF) highlights the importance of ensuring that the true nature of an agreement between contracting parties is captured by clear and unambiguous wording within the relevant written contract.
BWF is the owner of a wind farm and entered into an Engineering, Procurement and Construction Contract (EPC Contract) with SGRE, whereby SGRE agreed to perform certain works in relation to the wind farm.
Pursuant to the EPC Contract, if SGRE failed to complete the contracted works by the agreed date for practical completion, it would be liable to pay delay liquidated damages (DLDs) to BWF. Further, SGRE was also required to provide two unconditional bank guarantees as security for its performance of the EPC Contract (Performance Securities).
A dispute arose between the parties, as the contracted works were not completed by the due date for practical completion. BWF threatened to call on the Performance Securities, however, SGRE disputed that they were responsible for the delay to practical completion of the works.
The parties subsequently entered into a three-paragraph agreement (Second Agreement) stating that:
- “BWF will continue to offset any DLDs against payments or any amounts due to SGRE for the above project.
- Except in any process provided for in clause 41 of the EPC Contract, SGRE undertakes not to object to or oppose any such offset (other than for mathematical mistakes apparent in the DLDs calculations) and additionally will not exercise its rights under or in connection with the security of payment legislation in relation to this matter.
- BWF will accordingly not exercise its rights to draw on the Performance Securities in its possession in relation to this matter. For the avoidance of doubt, BWF will not make a demand or claim under the Performance Securities before giving at least 5 business days prior written notice.”
The term ‘this matter’ was not clearly defined in the text of the Second Agreement.
Only a few days after the Second Agreement had been signed, BWF attempted to call on the Performance Securities.
SGRE sought an injunction restraining BWF from calling on the Performance Securities as SGRE now argued that this was contrary to the Second Agreement. SGRE argued, on the basis that the Second Agreement did not specifically refer to only DLDs arising prior to 30 August 2019 (August DLDs), that the term ‘this matter’ was not ambiguous and captured all DLDs under the EPC Contract, not just August DLDs. Accordingly, it was SGRE’s position that BWF should be prevented from calling on the Performance Securities as payment for any and all DLDs arising under the EPC Contract.
BWF’s position was that, taking into account the circumstances surrounding the negotiation and signing of the Second Agreement, the Second Agreement only prevented BWF from calling on the Performance Securities in relation to August DLDs. It also argued that, as the term ‘this matter’ was ambiguous, the Court should adopt an interpretation of the EPC Contract that would make the most sense from a commercial perspective. BWF contended it would make little commercial sense for it to forgo its rights to claim under the Performance Securities for all DLDs under the EPC Contract, and that therefore the Court should form the view that the Second Agreement related only to August DLDs, as this was the more commercially sensible interpretation.
The Court’s decision
The Court confirmed that, when determining the meaning of terms in a commercial contract, ‘the Court asks what a reasonable businessperson would have understood those terms to mean’ and that, to answer that question, ‘the reasonable businessperson [is] placed in the position of the parties.’ Further, the Court confirmed the position of the High Court that evidence of surrounding circumstances is admissible to assist in the interpretation of a contract if the language is ambiguous or susceptible of more than one meaning.
The Court accepted BWF’s argument that the term ‘this matter’ was ambiguous and capable of more that one meaning. However, the Court held that a reasonable businessperson in the position of the parties would have understood the subject matter of the Second Agreement to be all DLDs and not just August DLDs, for the following reasons:
- There was no reference in the subject or the terms of the Second Agreement purporting to limit the DLDs or the certified progress payments to those that had accrued in August 2019.
- BWF’s contention that the Second Agreement was limited to August DLDs is inconsistent with clause 1 of the Second Agreement, which plainly made provision for a continuing right to offset future claims for DLDs against future certified progress payments.
- Throughout negotiations between the parties in relation to the Second Agreement, there was no reference or discussion confirming that the Second Agreement would only relate to Augusts DLDs.
Further, the Court disregarded BWF’s argument that it would be commercially unreasonable to forgo its rights to claim under the Performance Securities. The Court followed previous decisions that it should be wary before applying the so-called ‘business common-sense’ test and that it should not evaluate the commerciality of the Second Agreement as it would be “inappropriate to embark on an assessment of the relative commerciality of the competing constructions, particularly when the resolution of such assessment would require reference to extensive contested evidence.”
Accordingly, parties to commercial contracts should take great care to ensure that the terms of such contracts clearly capture the intended agreement between the parties. Where the meaning of terms are ambiguous, Courts will take into account evidence of surrounding circumstances. However, Courts may still uphold a particular interpretation of a contract even if it appears to be commercially unreasonable towards a party.
If you require assistance preparing a binding commercial agreement that clearly and concisely reflects agreed commercial terms, then please do not hesitate to contact us.