The interaction between some important rules of contract interpretation has been highlighted and explained in a recent judgment of the Supreme Court of NSW in NEXTracker Inc v ACN 003 905 093 Pty Ltd (formerly RCR O'Donnell Griffin Pty Ltd) (in liq) [2019] NSWSC 1604.
The key rules and principles considered by the Court were:
- Objective test: rights and liabilities under a contract are determined objectively, by reference to the text, context and purpose of the document.
- Construing terms: the meaning of the words used in a contract is ascertained by asking: what would a reasonable businessperson have understood those words to mean? This exercise involves consideration of the language in the context of the document as a whole, as well as the circumstances addressed by the contract and commercial purpose or objects of the contract.
- Avoiding redundancy: a construction that gives effect to all provisions in a contract will generally be preferred to one that leaves any provisions redundant (redundancy principle). However, the redundancy principle is merely a guide to assist in ascertaining the parties' objective intentions.
- Amendments to standard terms: courts will pay particular attention to language that has been specifically chosen by the parties, on the basis that this is more likely to reflect their objective intentions.
Upon applying these rules and principles, NEXTracker Inc was held to have transferred title in solar farm equipment (Equipment) to RCR O'Donnell Griffin Pty Ltd (in liq) (RCR) despite the fact that NEXTracker will never receive payment for the equipment.
Project background
Prior to RCR entering into liquidation in March 2019, NEXTracker contracted with RCR for the provision of Equipment for use on the Greenough River Solar Farm in Western Australia.
After the Equipment was loaded for shipping to site and NEXTracker provided associated documentation to RCR – but before RCR paid for the Equipment – RCR entered into liquidation. The Equipment was sold in the liquidation of RCR. The proceeds of that sale would belong to the party who proved it had title to the Equipment.
The resolution of the case required the reconciliation of conflicting terms, including specific language inserted into the particulars of contract annexed to a standard form contract. That specific language dealt with subject-matter (being transfer of title) of a nature that was already addressed in the General Conditions and went beyond the purpose that the contract particulars usually fulfil.
Clause 20 of the General Conditions was the critical clause. It provides, in part:
20.1 Risk in the Equipment
Risk in the Equipment shall pass from the Supplier to the Purchaser as stated in Item 27.
…
20.2 Ownership of Equipment
Ownership of … the Equipment … shall pass to the Purchaser at the time … specified in Item 28.
If the Equipment … is to be imported, ownership of the Equipment … shall pass to the Purchaser upon:
a) payment to the Supplier of the value of the Equipment …; and
b) [the provision of certain documents].
Item 27 of Annexure Part A did not simply record a date upon which risk in the Equipment would pass, but instead included language that was akin to a general condition. It stated that "the risk of loss and title for the Equipment shall pass from the Supplier to the Purchaser at the port of origin" (emphasis added).
The default position in Item 28 of Annexure Part A was that ownership would pass at the time of payment for the Equipment (which never occurred). However, the parties altered the default position by choosing specific, tailored language which stated that the time at which title to the Equipment passes to the purchaser is: "Date that the Purchaser receives the confirmed marine (or transit) insurance policy and the Equipment has been loaded on the boat at the port of origin".
Therefore, the unamended language of clause 20.2 provided that title passed upon payment; whereas the language of Item 28 of Annexure Part A provided that title passed when the Equipment was loaded onto the ship and insurance was confirmed.
Analysis and resolution
It was common ground that RCR had not paid for the Equipment. NEXTracker's case therefore depended upon clause 20.2, because if title only passed upon payment – as provided for in clause 20.2 – the proceeds of the sale would belong to NEXTracker.
Although Justice Ball recognised that this argument was "attractively simple", it was rejected. Instead, Items 27 and 28 of the particulars in Annexure Part A were relied upon by the judge when determining that title in the Equipment passed to RCR at the port of origin.
The specific language inserted by the parties into Item 27 extended beyond the concept of "risk of loss" to "risk of loss and title". Justice Ball concluded that this was evidence of the parties' objective intention that the identified marker (being at the port of origin) set the time at which title also passed to RCR, not only the risk of loss. As a result, it was held that "whatever the intended purpose of Item 27 was in the structure of the Standard Conditions, the parties chose to record more of their agreement in that item than the Standard Conditions contemplate".
NEXTracker also argued that clause 20.2 provided an exception to that position, in cases where the Equipment was imported. However, Justice Ball held that this interpretation would not make commercial sense. This is because, at the time the agreement was entered into, the parties anticipated that all Equipment would be imported. Therefore, NEXTracker's interpretation would have meant that the specific, tailored language inserted into Item 28 was intended to only cover circumstances that were not in contemplation at the time, being the sourcing of Equipment from within Australia. This was held to be an unlikely scenario, particularly in circumstances where the parties had deliberately changed the default position in Item 28, which otherwise would have provided for the transfer of title upon payment.
Justice Ball recognised that if Items 27 and 28 were given complete primacy, then clause 20.2 would become redundant. However, this alone was not a sufficient reason to adopt a different interpretation of the contract as a whole. The redundancy principle was forced to yield when the resultant interpretation "does violence to the words that the parties specifically chose to insert in Items 27 and 28 to express their agreement".