The recent NSW Court of Appeal decision in the case of Wollongong Coal Ltd v Gujarat NRE India Pty Ltd  NSWCA 135 highlights the importance of clear drafting in commercial agreements and revisits the law relating to contract construction and interpretation. From a Commonwealth Government perspective and in the commercial procurement context, the case illustrates the primacy that courts will attach to the actual text of a contract, demonstrating the importance for parties to ensure that the words of a contract match their intentions.
The two companies which were subject of the litigation, Gujarat NRE India Pty Ltd (GNI) and Wollongong Coal Ltd (WCL), were both members of a group of companies called the Gujarat Group. The parent company, Gujarat NRE Coke Ltd (GNC) indirectly owned all shares in GNI. Both directly and through other member companies of the Gujarat Group, GNC also controlled 62% of the votes of ordinary shareholders in WCL.
GNI commenced proceedings against WCL claiming a right of indemnity as guarantor after having been called upon to meet WCL’s obligations (as well as a separate debt of approximately $6.5m). WCL sought to rely on a waiver of the indemnity made in a later agreement and the case turned on the proper construction of that waiver.
| This case highlights the significance and weight that Courts will attach to the actual wording and ordinary meaning of a provision of a contract, deed or agreement, even where context may create ambiguity. The commentary of the Court in response to the privity arguments also makes clear that it is open to a party to create obligations in a multi-party deed which are for the benefit of some of the parties but not for others
In 2013, WCL entered into an agreement with UIL (Singapore) Pte Ltd who made an advance payment to WCL $20m, in exchange for which WCL would supply it with coal. GNI acted as guarantor and offered by way of security its 150 million fully paid ordinary shares in WCL. WCL breached the agreement by failing to supply the coal.
The three companies (along with another fourth company) then entered into a deed of repayment under which the debt to UIL would be repaid over time. WCL then failed to make the scheduled repayments and accordingly, UIL took possession of the shares and sold them. As guarantor, GNI was granted an indemnity by WCL.
The deed contained a provision (clause 5.3) which read:
[GNI] irrevocably waives and must not exercise any right of indemnity or subrogation which it otherwise might be entitled to claim and enforce against or in respect of [WCL].
Central to GNI’s attempt to enforce its indemnity against WCL was an argument that provision of the deed was intended to benefit UIL as against GNI and that its right to be indemnified by WCL continued as against WCL despite the provisions of clause 5.3. That is, the promise to waive its right of indemnity was made to and for the benefit of UIL only and accordingly it argued that only UIL could enforce the provision.
In response, WCL argued that on the proper construction of that provision of the deed, the waiver had the effect of a unilateral waiver by GNI of its rights to be indemnified by WCL. In the alternative, it submitted that the doctrine of “privity” entitled it to enforce the waiver (the terms of which were clear and unequivocal).
In respect of the indemnity, the Court decided in favour of WCL. Its decision turned on the proper construction of the clause 5.3 of the deed.
On the point of construction, the Court found that, although ambiguity required the provisions of a contract or deed to be read in context and by reference to the objectives and purposes of the deed or contract in which it appears, the ordinary meaning of the words of the provision itself must be given primacy (Bathurst CJ, , agreeing with Leeming JA, -).
Although the Court took issue with WCL’s assertion that clause 5.3 was unambiguous (the fact of the dispute about its meaning was evidence of the same), they did find that the ordinary meaning of the words of clause 5.3 created a legally effective and unilateral waiver of its right to be indemnified. Accordingly WCL would be entitled to enforce the waiver as against GNI (Leeming JA, see , Bathurst CJ agreeing, see  and ).
Proper construction of clause 5.3
Both opinions in the decision rejected the submission of WCL that clause 5.3 was “clear and unambiguous”: “[t]here is always the possibility that the seeming clarity and absence of ambiguity of the plainest language is falsified by some other provision in the document, or something else in the context” (Leeming JA, ). However, Court ultimately found that on its proper construction, giving priority to the ordinary meaning of the actual text of the provision, the clause was to be interpreted as being an “immediately effective and unilateral renunciation of the respondent’s right of indemnity” (Leeming JA, ).
In his reasons, Leeming JA cited the primary judge’s consideration of the context and the structure of the document, noting that the primary judge gave weight to the fact that the relevant provision was positioned in clause 5, which contained a number of terms which were either expressly or implicitly in favour of UIL alone (at ). In contrast to the reasons for the decision in first instance, the Court of Appeal focused on textual meaning of the words in clause 5.3.
In construing the clause, Leeming JA focused attention on the phases “irrevocably waives” and “must not exercise”, suggesting that both phases brought their own discrete legal meaning: “irrevocably waives” would be an immediately effective and unilateral renunciation of the right in question, whereas “must not exercise” was a promise not to take action to enforce the right. To construe the clause in a way that prevented WCL from enforcing the clause, would be to ignore the words “irrevocably waives”, giving them no meaning whatsoever (at -). He concludes, “[c]lause 5.3 is not purely promissory. It has two components, the first of which is an irrevocable waiver by GNI of indemnity against [WCL]” ().
The conclusion reached by Leeming JA on the construction to be attributed to the words “irrevocably waives” was that it was an “unilateral act immediately effective” () to abandon the right of indemnity. That waiver or abandonment could not be said to be enforceable by select parties to the deed (see -). Accordingly, the issue was decided in favour of WCL.
The ‘Privity’ Submission
Although it did not form part of the reasons for the decision, the Court did make some interesting comments in respect of the submission on behalf of WCL in respect of the doctrine of privity. The opinion of Bathurst CJ (at -) provides a useful summary of the treatment of the WCL’s submission:
… Although it is strictly unnecessary to deal with the matter, I agree with Leeming JA that the submission based on privity was misconceived. The submission presumably was referring to the doctrine that only parties to the contract can sue on it …
However, the doctrine does not establish the converse, namely, that a party to a contract can in all cases enforce all promises made in it. That ultimately will depend on the construction of the contract or the deed in question.
Implicit, in the statement by Bathurst CJ is that, although on its proper construction clause 5.3 did have the effect of creating a unilateral waiver of the right to be indemnified, it may have been open to the parties to draft the clause in such a way that the waiver would not bind GNI as against WCL. In other words, the implication made by WCL that the doctrine of privity applied in reverse (that is, that it gives all parties to an agreement a “positive right” to enforce all of its provisions) was misconceived. According to Leeming JA, a “necessary condition” (that is, that a party must be party to a deed or agreement in order to sue on it) “is distinct from a sufficient condition” (in other words, that simply by being party to a deed or agreement entitles one to sue on any of its provisions).
Leeming JA concluded that, had it been necessary to decide the point, he “would hold that a promise in a deed inter partes could by implication be limited so as to enable its enforcement only by a particular party” and that “construction – the process of fixing the contractual words with legal meaning”, was essential to ascertaining whether or not a provision was enforceable by all, or by only some of the parties to the deed.
The case is useful for two reasons. Firstly, it highlights the significance and weight that Courts will attach to the actual wording and ordinary meaning of a provision of a contract, deed or agreement, even where context may create ambiguity. The text of the relevant provision will always be the starting point.
Secondly, the commentary of the Court in response to the privity arguments makes clear that it is open to a party to create obligations in a multi-party deed which are for the benefit of some of the parties but not for others. The doctrine of privity does not extend to permit all parties to a deed or agreement to enforce all of the obligations or pursue all of the rights created by that deed or agreement. Rather, the ordinary principles of construction and interpretation will apply in ascertaining for whom any contractual promise or obligation is intended to benefit.
The case is a good reminder of the importance of the use of clear and precise language in the drafting of agreements to ensure the rights and interests of a party are properly protected. For all kinds of Government contracting, it is important to ensure that the express wording of any agreement properly reflects the interests and intentions of stakeholders.