In brief

The Alliance Building and Construction Pty Ltd v Veesaunt Property Syndicate 1 Pty Ltd [2024] QCA 75 case is representative of the objective approach that courts will take to construing commercial contracts, giving effect to what a reasonable business person would understand the contract to mean.

The issues in this appeal concerned the interpretation of certain contractual conditions that had to be either:

• satisfied by the appellant (Contractor); or
• waived by the respondent (Principal),

failing which, the contract would be terminated. In particular, the matter turned on whether a notice to proceed to commence construction works issued by the Principal constituted a waiver of unsatisfied conditions.

The judgment of the Queensland Court of Appeal highlights well-established rules of construction (broadly applicable to all contracts, and in this case, a building and construction contract), the significance of commerciality and the ‘contextual scene’.

Case study

The parties entered into a contract under which the Principal engaged the Contractor to design and construct residential townhouses in Gold Coast (Contract). The parties’ rights and obligations under the Contract were subject to a set of ‘conditions precedent’. If these conditions were not properly satisfied or waived by a date nominated by the parties (Nominated Date), the Contract would terminate on that date.

Clause 6 of the Contract relevantly stated:

6. Conditions precedent

6.1 General

(a) The rights and obligations of the parties under the Contract, … are subject to the satisfaction or waiver of the conditions precedent in clause 6.2.

(b) The satisfaction of each of the conditions precedent identified in clause 6.2 can only be waived by written notice from the Principal (on such conditions (if any) as the Principal may stipulate).

(c) Unless each of the conditions precedent identified in clause 6.2 have been satisfied, or waived under clause 6.1(b), within 3 months of the date of the Contract Date (or such later date as the Principal and the Contractor may agree in writing):

(i) the parties will no longer be bound by the terms of the Contract … ;

(ii) the Contract will be taken to have been terminated on that date (or such later date as the parties may agree) and the Contract will be of no further force or effect; and

(iii) the Contractor will have no entitlement under or in respect of the Contract … .

6.2 Specific conditions precedent

(a) The following conditions precedent are required to be satisfied before the Contract will commence:

(i) finance being approved by the financier (at the Principal's discretion);

(ii) receipt by the Principal of evidence of all insurance required to be effected by the Contractor under the Contract;

(iii) a single director of the Contractor executing a deed of guarantee and indemnity, set out in Annexure Part O, in accordance with clause 5.6A. [sic]

(iv) the Contractor providing security in the amount stated in Item 14 in accordance with clause 5 of the General Conditions of Contract; and

(v) the Contractor executing any financiers' deed in accordance with clause 47 (if required to do so by the Principal).

Clause 47 of the Contract required the Contractor to execute the financiers’ (sic) deed referred to in cl.6.2(a)(v) (financier’s deed) within 14 days of receiving a written request from the Principal to do so. However, it could be inferred from cl.47 that, if the Principal wanted to include execution of the financier’s deed as one of the conditions precedent, the Principal would have to:

• make the request more than 14 days before the Nominated Date; and
• request the Contractor execute the financier’s deed before the Nominated Date.

On the last business day before the Nominated Date, the Principal’s agent (the Superintendent) issued to the Contractor by email, and copied in the Principal, a notice to proceed with construction works (Notice to Proceed), which stated:

This is a notice to proceed with contract works as clause 6.2 under the contract has been satisfied as per the below:

• Formal finance approval from ANZ has been received and therefore preconditions per clause 6.2 have been satisfied.
• The building contract tie-in deed will be submitting within 14 days in accordance with clause 47.

In fact, the conditions precedent set out in cl.6.2(a)(ii) and (iv) had not been satisfied due to the Contractor’s failure to effect the insurance, and provide the security, required under the Contract. The Contractor did not proceed with the construction work, asserting (somewhat ironically) that the Notice to Proceed did not effectively waive the unsatisfied conditions precedent and the Contract had, therefore, been terminated.

The Principal sought a declaration from the Supreme Court of Queensland that the conditions precedent had been satisfied or waived, and a declaration that the Contract remained on foot and was binding.

Competing claims

At first instance, the Principal argued that the Contract remained on foot because:

• the Notice to Proceed constituted a waiver of any of the unsatisfied conditions precedent (Principal’s first argument); and
• the only conditions precedent that had not been satisfied related to the Contractor not providing security and evidence of insurance. Accordingly, the Contractor was prevented from relying upon its own failures to assert that the Contract was terminated (Principal’s second argument).

The primary judge rejected the Principal’s first argument, but accepted the Principal’s second argument on the grounds that the Contract, properly construed, was sufficient to exclude a party from taking advantage of its own default. This reflects the common law principle that non-fulfilment of a condition by a party would render a contract voidable, which the other party may elect to affirm, but not automatically terminated. (See Gange v Sullivan (1966) 116 CLR 418 at 441.)

The Contractor appealed the primary judge’s decision, arguing that:

• the condition requiring the Contractor to execute the financier’s deed had neither been satisfied nor waived by the Nominated Date;
• the Principal had not given the Contractor a copy of the financier’s deed with a request that it be executed, more than 14 days before the Nominated Date; and
• the non-satisfaction of that condition precedent was, therefore, not solely a result of the Contractor’s own default.

In its notice of contention, the Principal argued that the primary judge had erred in rejecting its first argument.

Judgment

The Court of Appeal dismissed the appeal by the Contractor and accepted the Principal’s arguments (including its contention against the primary judge’s decision).

As explained by Bond JA (with whom Mullins P and Dalton JA agreed), the key issue of contract interpretation was:

should the [Notice to Proceed] be construed as a notice under clause 6.1(b) waiving further compliance with the clause 6.2(a) conditions precedent?

The Court of Appeal cited the principle that, in determining the meaning of unilateral contractual notices, the law generally favours a ‘commercially sensible construction’. (See Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 at 771.) Words in commercial contracts are interpreted in the way in which a reasonable business person would construe them. This objective approach to interpreting contracts is preferred over ‘technical interpretations and undue emphasis on niceties of language’.

Bond JA determined that a reasonable businessperson, in the position and with the knowledge of the Contractor, would have:

• been ‘acutely aware’ of the contextual scene that, insofar as the Notice to Proceed required the financier’s deed be executed, it did not require that deed be executed by the Nominated Date;
• regarded the Notice to Proceed as notifying the Contractor that ‘the Contract had become unconditional and the Contractor was authorised to proceed with the contract works’; and
• realised that the Principal had been copied in on the Notice to Proceed when the Superintendent sent it to the Contractor. Accordingly, the reasonable businessperson would have construed the Principal’s response to the Contractor’s email as the Principal communicating its agreement with the Notice to Proceed.

The Court of Appeal also rejected the Contractor’s technical argument that the Notice to Proceed made the execution of the financier’s deed a condition precedent because of the way in which the requirement was communicated. Specifically, Bond JA reasoned:

Clause 6.2(a)(v) was expressly qualified by the words “(if required to do so by the Principal)”. It follows that the compliance with clause 6.2(a)(v) could only be regarded as one of the clause 6.2(a) conditions precedent if the Principal had required the Contractor achieve that result before the Nominated Date. It was common ground that it had not done so...

In conclusion, the Court of Appeal held that the Notice to Proceed had not made the execution of the financier’s deed into one of the conditions precedent, and operated as a waiver of the unsatisfied conditions precedent, such that the terms of the Contract continued to bind the parties.

Key takeaways

This case illustrates how important it is to draft clear and precise contractual clauses, particularly in relation to conditions and notices that affect the rights and obligations of parties under a contract.

Substantial parts of contracts are often drafted by representatives of the parties who have no expertise in commercial contract drafting and contract law. For example, detailed specifications of the goods or services being procured may be set out in a Statement of Work prepared by technical subject matter experts (SMEs), sometimes without any legal review.

Further, with a focus on the relevant goods or services, SMEs might not address the broader context or the commercial purposes of the parties, to which courts will have regard when construing the objective meaning of contract terms. Formulaic expressions may lead to difficulties in applying a contract in practice and can potentially give rise to protracted disputes. The courts will search for a construction that best fits the contract’s (presumed) commercial objective. In such a case, there is no guarantee that it will be the interpretation that best matches your own subjective intention.