A reminder from the Western Australian Supreme Court – the Court’s willingness to correct contractual provisions before declaring a provision void

Introduction

A recent decision of the Western Australian Supreme Court provides some useful guidance as to when the courts are willing to read in words to the provisions of a contract, where such provisions cannot be applied literally without modification.

Background

Merilla Pty Ltd v Commonwealth of Australia [2015] WASC 309 concerned a lease between the owners of land in Busselton, Western Australia (Owners) and the Commonwealth of Australia (Commonwealth) for a term of seven years commencing 4 May 2010, with two options of renewal for further terms of three years. 

The lease provided for rent reviews to the greater of an increase of 3.5% or a CPI increase, except for the fourth rent period.  Notwithstanding that it was the method of rent review and the construction of the relevant rent review clause in relation to the fourth rent period which was the subject of this decision, the Court also considered whether this clause was void for uncertainty.

The competing claims

The Owners’ primary claim was that in June 2013 the parties agreed that the rent for the fourth rent period would be the rent calculated as an increase of the rent from the third rent period by the greater of 3.5% of annual CPI.  By reaching this conclusion, the Owners pleaded that clause 5.7.1 of the lease was void for uncertainty in that there was no procedure set out in Schedule 7 of the lease for determining market rent.

The Commonwealth contended that Clause 5.7.1 was not void for uncertainty.  The Commonwealth pleaded that, the parties having failed to agree on a new rent for the fourth rent period within the prescribed time, the procedure in Schedule 7 should be used determine the rent, and market rent was determined in accordance with the procedure set out in Schedule 7. 

The lease provisions

The relevant provisions of the lease are as follows:

  • Clause 5.7.1 provides:

                    The rent for the fourth Rent Period of the Term shall be the rent which is agreed between the Parties and failing agreement within three months after the commencement of that Period, the market rent determined in accordance with the procedure set out in Schedule 7.

  • Schedule 7 provides:

A.1.1. If the Parties fail to agree the Rent for the fourth Rent Period of the Term in accordance with clause 5.7 or the first Rent Period of the Further Term in accordance with clause 33.1.1.e, the Rent will be determined by a Valuer appointed in accordance with clause A.2.1 of this Schedule.

A.2.1. If the Parties fail to agree on a Valuer within 14 days after the expiration of a period of 3 months following the commencement of the Further Term either Party may request the president of the Institute to appoint a Valuer.

  • Clause B.1.1. of Schedule 7 specifies that:

the Valuer must determine the open market value of the Premises at the commencement of the Further Term.

  • Clause 33.1.1 also provided that where the Owners grant a new lease of the premises to the Commonwealth for a further term, the Landlord must grant a new lease of the premises:

at an initial Rent for the first Rent Period which is agreed between the Parties or failing agreement within three months after the commencement of the new leases determined in accordance with the procedure set out in schedule 7.

  • The date of the review at the third anniversary of the commencement date of the lease, referrable to the fourth rent period, was termed the ‘Market Review Date’.

The commercial context

In construing the terms of the lease, Beech J gave regard to the commercial context of the lease. [1] Pursuant to an agreement between the Commonwealth and Merilla Pty Ltd (Merilla) (one of the Owners of the premises), the Commonwealth contracted Merilla to:

  • design and construct a building to the Commonwealth’s specifications, tailor-made to suit the Commonwealth’s needs;
  • to lease that land and building back to the Commonwealth; and
  • subject to an immaterial exception, the only payments to be made by the Commonwealth in respect of the construction costs were in paying rent under the lease,

(the DCL Agreement).[2]

The decision

Ultimately, Beech J held that:

  • the market rent review under clause 5.7.1 of the lease applied to the fourth rent period of the term of the lease[3]; and
  • clause 5.7.1 of the lease was not void for uncertainty[4].

Beech J found that the language of clause 5.7.1, read with Schedule 7 and in the context of the lease as a whole, is not expressed too ‘irremediably obscurely’ that the court is unable to put any definite meaning on it.[5]

In His Honour’s opinion, it is evident from clause 5.7.1 that the parties intended that the process of determining market rent under clause 5.7.1 would be governed by Schedule 7.  However, to give effect such intention, Beech J determined that some modification to the provisions of Schedule 7 was required.[6]

Beech J held that clause 5.7.1 should be construed as if it included the words ‘with all necessary modification’.[7]  In particular, Beech J said that it was necessary to read those words into the clause to make the instrument ‘sensible’ as a matter of construction.[8]

His Honour also made the following comments in relation to reading in words and the consideration of background facts:

  • there is a limit to the work that can be done by considerations of background facts, object and purpose;
  • those considerations do not permit the court to ignore the language of the text, or to rewrite it to include provisions reflecting what the court might infer from the background fact to have been intended by the parties; and  
  • reliance on background facts must be tempered by loyalty to the contractual text.[9]

Implications of the decision

A provision of a contract may be void for uncertainty where a court is unable to put a definite meaning on the provision(s).  This decision provides some certainty regarding circumstances where courts will permit words to be added or omitted, by construction, to the words used in a clause to reflect the intention of the parties to an agreement.  Namely:

  • where there are obvious errors in the terms of an instrument the court will construe the instrument to conform with the intention of the parties; and
  • to avoid any absurdity or inconsistency, or to make the instrument sensible as a matter of construction, the court can supply, omit, correct or interpret words where it is necessary to do so.

However, there are limits on how far the court can go to avoid a conclusion of uncertainty. 

The court will take into account the objective purpose of the transaction, taking into consideration the genesis of the transaction, its background and the commercial context.  Although, as Beech J highlights, this does not permit the courts to simply ignore the language of the text, or to rewrite provisions on the basis of inferences the court may make from the background of the transaction.

The case highlights the need for consistency in drafting commercial documents.  The issues in this case in the use of the inconsistent terms “market rent” and “open market rent” could have been avoided by use of the one consistent term with the basis of the calculation of that method of rent review being consistent with the term used.

 

[1] Ibid [102].

[2] Ibid [116].

[5] Ibid [144].

[6] Ibid [142].

[7] Ibid [135].

[8] Ibid [135].

[9] Ibid [141].