Contract law update 2025: Operation and interpretation of contracts

Contract law update 2025

What happens if a contractual mechanism doesn't work? Does the contract fail, or can a court step in and provide its own mechanism?

For over 200 years, courts have considered variations of the following scenario:

The parties require an independent valuation of an asset that one of them is to acquire.
The contract provides for each party to appoint a valuer and, in the absence of agreement between them, for those valuers to agree on a third valuer to provide the valuation.
The process breaks for various reasons, including:

ones beyond the control of the parties (eg the valuers refusing to provide valuations, or failing to agree on a third valuer); and
the breach of contract by one party (eg by refusing to nominate a valuer).

Similar issues can arise where a contract provides for a third party—such as the president of a law society—to appoint an expert or arbitrator, but they decline to do so.

Historically, courts generally declined to intervene when the process broke down—even if that was due to one party's breach of contract. One rationale was that it was not the role of the court to substitute its own mechanism for that agreed between the parties.

In recent decades, the courts have been more willing to take a flexible approach, but there is still uncertainty about when a court might do so, as evidenced by the decision of the Victorian Court of Appeal in Alphington Developments.^¹ The facts in that case were somewhat more complicated than in the typical valuer cases mentioned above, and there were divergent views on whether the contractual mechanism had in fact failed. In dissent, Justice Lyons observed that it was difficult to identify any principled or jurisprudential basis for courts imposing alternative machinery. Nevertheless, the majority did seek to draw some principles from the authorities, including that:

A court may step in if the contractual machinery fails.
A court will not step in if the machinery was itself essential to the main purpose of the contract (eg if the identity of the valuer was, for some reason, critical to the contract, rather than just being a means to determine a fair value).
The court may supply alternative machinery whether or not the failure is due to a breach of contract by one of the parties, but a party cannot rely on its own breach to its advantage.

Given the uncertainties in this area of the law, parties should perhaps consider expressly stating what should happen if the contractual mechanism fails.

Our 2019 contract law update considered a decision of the Victorian Court of Appeal^² on the consequences of a notice not strictly complying with the terms of a contract.^³ The court in that case adopted a commercial approach, and held that an immaterial non-compliance did not make the notice invalid. In Alphington Developments, the Victorian Court of Appeal again adopted a commercial approach, relying in part on its decision in 2019. Nevertheless, the fact that the trial judge held the notice to be invalid emphasises the importance of trying to ensure that notices do strictly comply with the contractual requirements.

Another issue considered in a recent contract law update^⁴ is the application of release clauses in settlement deeds to matters not expressly mentioned in the settlement deed. The difficulties in applying settlement deeds in this context were illustrated by the majority and dissenting judgments in Sanmik Food Pvt Ltd v Alfa Laval Australia Pty Ltd.^⁵ It is, of course, preferable if the deed expressly deals with all outstanding issues between the parties, so as to avoid the uncertainty of courts having to try to ascertain the parties' intentions from the terms of the deed.

Failure of contractual machinery

The Victorian Court of Appeal considered whether contractual machinery had failed as a result of informal accommodation or amendment to the contract.

The court held that, when properly construed, the relevant contractual machinery had in fact failed and remitted the matter to the Trial Division to provide alternative machinery.

The case contains an important discussion of the principles concerning failure of contractual machinery. It also serves as a reminder of the need for clear drafting and careful consideration of the wider contractual implications when proposing informal accommodations or amendments.

The case concerned a 2013 contract for the sale of an industrial site between Glenvill, the purchaser, and Amcor, the vendor (the APM Contract). Glenvill proposed to redevelop the site for residential use. Before the sale, Amcor commissioned an environmental consultant (Ramsay) to undertake a detailed site investigation. The investigation revealed the presence of asbestos in some of the structures and building materials, but it did not find asbestos in the soil.

Both parties recognised there might be further contamination that had not been identified by Ramsay (Unidentified Contamination) and would need to be remediated. The following Special Conditions (SCs) were included in the APM Contract to reflect this understanding:

SC 11.3(a)(ii), which provided for Amcor to pay Glenvill the costs reasonably and properly incurred for remediation works, which included remediation of Unidentified Contamination;
SC 11.5, which provided for a detailed procedure to be followed if Unidentified Contamination was discovered, involving: a notification by Glenvill, accompanied by a letter from an environmental consultant (SC 11.5(a)); the capacity for objection by Amcor; and, in the event of objection, a determination by an expert as to the remediation to be undertaken, including an estimate of the costs for the necessary remediation (SC 11.5(c)) (broadly, the Remediation Issues). This expert determination was to be done prospectively, and the expert was to be appointed in accordance with the procedure set out in SC 18; and
SC 11.3(b)(ii), which provided for certification of the invoices produced by Glenvill for remediation works, including those relating to Unidentified Contamination, by a quantity surveyor.

In 2014, Glenville discovered Unidentified Contamination in the form of extensive asbestos contamination in the soil. Glenville attempted to follow the procedures under SC 11.5, issuing what purported to be notices and letters under SC 11.5(a) (the UC Notices).

There was, however, no determination by an expert as required by SC 11.5(c), owing to correspondence between the parties in 2015 and 2017. The relevant correspondence was an important aspect of the Court of Appeal's decision to overturn the findings of the trial judge:

In 2015, the parties agreed that no expert determination of objections would be enlivened and that, in the meantime, Glenville would proceed with remediating the Unidentified Contamination specified in the UC Notices. Glenville would incur the costs in the first instance, but would have the right to seek to recover the costs properly and reasonably incurred. Neither party contended this correspondence resulted in any variation to the APM Contract.
In 2017, the parties agreed to informally amend the APM Contract, by deleting SC 18, the condition that provided for the appointment of an expert, and all references to it. This included those made in SC 11.5. They agreed that their disputes about the Remediation Issues would instead be determined by the court.

In June 2017, Glenville started proceedings to recover amounts it claimed were owing under the APM Contract, but was unsuccessful at first instance.

The decision at first instance

At trial, Glenville made a debt claim founded on progress claims certified by a quantity surveyor. The trial judge rejected this claim, on the basis that the quantity surveyor's certifications did not comply with the requirements under the APM Contract. The judge's rejection of this claim was not the subject of appeal.

In the alternative, Glenvill pleaded that the contractual provisions concerning the Unidentified Contamination had failed by reference to the correspondence in 2015 and 2017, requiring the court to 'step in' and determine the amount payable by Amcor to Glenvill. This was the primary issue on appeal.

The trial judge rejected the alternative claim, on two bases:

First, that Glenvill's ability to claim the costs associated with remediation of Unidentified Contamination was dependent upon it complying with the requirements under SC 11.5(a) in issuing UC Notices to Amcor. The judge found the relevant UC Notices were invalid because of defects or shortcomings in the accompanying letters prepared by the project's environmental consultant—that they were neither 'legally sound' nor 'well-founded'.
Second, that, in any event, on the proper construction of the contract, there was no failure of contractual machinery, as claimed by Glenvill.

Regarding the second basis, the trial judge found that neither the correspondence in 2015 nor 2017 meant the contractual machinery had failed:

As Glenvill did not assert there was an amendment to the APM Contract in 2015, it was difficult to understand its contention that the contractual mechanism failed at that time.
In the trial judge's view, the correspondence in 2017 evinced the parties' intention that the court was to determine the Remediation Issues after the works had been completed (ie retrospectively). The court, however, was not to determine any amount that was payable by Amcor to Glenville, as that task still remained with the quantity surveyor under SC 11.3(b)(ii). On this understanding, the trial judge stated Glenvill could have sought to have the court determine the Remediation Issues and then provide the results of that determination to the quantity surveyor, and it was 'unclear why Glenvill has chosen not to do so'. Therefore, the contractual machinery had not failed. Glenvill had simply failed to follow the contractual procedure required by the APM Contract.

The decision on appeal

The Court of Appeal (Justices Walker and Whelan, Justice Lyons dissenting) held that the contractual machinery concerning the Unidentified Contamination had failed. In so doing, the majority made the following findings:

First, the trial judge had, in analysing the letters' validity using the terms 'legally sound' and 'well-founded', imposed requirements on the accompanying letters that went beyond what was required in SC 11.5(a). Under the Court of Appeal's more relaxed understanding of the requirements, the relevant UC Notices were found to be compliant. On this point, Justice Lyons largely agreed.
Second, the contractual machinery in SC 11.5(c) failed on the proper construction of the contract. On this point, Justice Lyons' dissent largely aligned with the reasoning of the trial judge.

On the second finding, the majority found the contractual machinery had failed in both 2015 and 2017:

The 2015 correspondence meant that Glenville would proceed with remediating the Unidentified Contamination specified in the UC Notices and incur the costs in the first instance. This was significant, as it was no longer meaningful to have an expert resolve the Remediation Issues in SC 11.5(c), by estimating the costs for the necessary remediation, after the works had in fact already occurred. SC 11.5(c) remained on prospective terms at this time. The machinery, in their view, had effectively been abandoned by the parties through their chosen conduct.
In 2017, the parties agreed to delete the reference to SC 18 and the expert from SC 11.5(c) and have the court determine any disputes regarding Remediation Issues. In the majority's view, the amendment left significant uncertainty about which disputes were to be resolved by the court and how the court would resolve them. This was especially so because the parties had not amended SC 11.5(c) to reflect that the Remediation Issues were to be resolved retrospectively. It remained on prospective terms. This uncertainty was sufficient to conclude that there was a failure of contractual machinery in SC 11.5(c) in 2017.

Having found there was a failure of contractual machinery, the majority went on to conclude that the relevant provisions were not essential terms, and the court could and should provide alternative machinery. The Court of Appeal remitted the matter to the Trial Division to determine all outstanding disputes in relation to the Unidentified Contamination the subject of the relevant UC Notices.

Releases expressed in broad terms (per principles established in Grant)

The New South Wales Court of Appeal considered whether the word 'Claims' in the release clause of a settlement deed extended to a claim of ownership in title, in addition to the more typically considered use of the word, meaning a dispute or asserted demand.

The court held (by a 2:1 majority) that, on its proper legal construction, the release did not extend to the vendor's claim to title and that the word 'claim' denoted a dispute between the parties. As the proper construction at law was that the release did not apply, there was no need to consider whether equity should intervene to read down the release (under the principles established in Grant v John Grant (1954) 91 CLR 112).

The case is an example of how reasonable minds can differ on the application of the same facts and legal principles, when contractual terms are particularly broad or ambiguous. It exemplifies the importance of parties including express terms in settlement agreements, to deal with all known significant matters or disputes between them at the time of settlement.

The parties had entered into an agreement for the sale of two coconut milk production plants, which each comprised various components. The terms of the contract included that title to each plant would pass to the purchaser upon receipt of the full purchase price by the vendor. The vendor provided two components (but not a whole) of one of the production plants, and the purchaser made partial payment to the vendor before a dispute arose.

The vendor commenced proceedings, which were then settled. The parties entered into a settlement deed, along with a new agreement for supply of two production plants. The settlement deed contained a release stating that:

the parties 'have no further obligations in respect of' the initial agreement; and
the vendor 'releases and forever discharges [the purchaser] … from all Claims and actions arising from or in connection with the Settled Matters'.

'Claims' was defined to include 'any claim, action or liability of any kind …' and 'Settled Matters' was defined to include 'all claims and disputes between [the parties] which were the subject of, or in any way related to …' the initial agreement, supply, payment and proceedings arising out of that agreement.

Importantly, it was uncontentious between the parties that, as at the time of entry into the settlement deed and new agreement, the vendor still owned the components already delivered (as the full purchase price under the initial agreement had not been paid).

The vendor sought to use the two components already delivered under the initial agreement to discharge its obligations to supply such components under the new agreement.

The purchaser commenced proceedings, seeking declaratory relief that the vendor could not do so, because the release clause had 'released' the vendor's claim to title to the components, and so the vendor no longer had sufficient title to use them as supply under the new agreement. The vendor was successful in defending the proceedings at first instance and the purchaser appealed.

The New South Wales Court of Appeal dismissed the appeal by a 2:1 majority.

Justice McHugh and Acting Justice Griffiths held that the settlement deed did not release any claim by the vendor concerning its ownership of the components. The definition of 'Settled Matters' was not sufficiently broad to include the vendor's title to, or ownership of, the components, as it was not a claim 'between' the parties. The word claim 'refers to a dispute or contest between the parties and not to an undisputed claim of right', such as the vendor's ownership of the two components. In that regard, Acting Justice Griffiths considered this interpretation was supported by the word 'claim' being juxtaposed with other words connoting a dispute (such as 'action or liability' and 'disputes between them') in the relevant recital and definition of 'Claim'. As a result, there was no occasion to consider the scope of the equitable doctrine in Grant.

Further, the majority held that the settlement deed also did not release the purchaser's obligation to hold those items as bailee until the full purchase price was paid. The bailment arose in law, not as an obligation under the original contract.

In her dissenting judgment, Justice Adamson found that the purchaser's obligation as bailee was released and, while it could never obtain good title to the components (because the full purchase price under the initial agreement could never be paid following that agreement's termination), its title by reason of its possession of the components was better than the vendor's. The vendor thus did not have sufficient title to use the components in discharging its obligations under the new agreement.

While recognising there was 'considerable force' in the submission that the word claim 'connotes some kind of dispute or contentious issue', her Honour ultimately preferred the construction that the vendor's claim of title was captured by the release, because it was a matter considered in the recitals and 'was unresolved and about which the parties were plainly at cross-purposes'.

Although in disagreement on the ultimate outcome, Justice Adamson and Justice McHugh were united in the view that the failure of the settlement documents to contemplate the previously supplied components (known to both parties) made it 'almost inevitable that the Settlement Documents would require judicial interpretation'. Meanwhile, Acting Justice Griffiths considered that '[t]he issues of construction raised by the appeal are strongly contestable. Their resolution is not straightforward'.

This case is a cautionary tale against parties (and their legal advisors) remaining silent on a salient point in negotiations 'to retain the hope that their respective subjective intention would prevail in any litigated contest'. The potential results of the judicial interpretation of such a matter are far from certain.

Contractual interpretation—whether doctrine of election engaged—whether valid exercise of contractual rights

In this case, the New South Wales Court of Appeal considered whether a contractual clause providing for various 'scenarios' that could be chosen by the appellant required that party to choose between alternative and inconsistent rights such that the common law doctrine of election applied.

The court held that while the contractual clause conferred a right of choice upon the appellant, it did not oblige him to make an election. As such, it was not necessary to attribute the appellant's conduct to any election between the various scenarios. The appellant's conduct otherwise did not amount to a clear and unequivocal choice of any particular scenario.

This case highlights the importance of clear contractual language regarding obligations and rights, and reinforces the need for unequivocal conduct or communication in exercising rights under a contract.

The appellant entered into a written contract with the respondent for an investment in a company. The agreement was entered into on 26 May 2017 and stated to be valid until 31 December 2020. Clause 4 of the contract contemplated three scenarios that would become available to the appellant in the fourth year following his investment. One of these scenarios involved the appellant selling his shares in the company at 'market price', and the respondent paying to the appellant any shortfall between the market price of the shares and the sum of $1.5 million.

The appellant sold his shares in the company on 17 May 2023, at a market price of $1,000, and claimed he was entitled to payment of the $1,499,000 shortfall from the respondent. The primary judge found that the appellant had not clearly and unequivocally chosen that scenario within the 'option window', and, as such, rejected the claim. The appellant appealed this decision, arguing that:

He was obliged to elect between the scenarios contemplated by clause 4, rather than merely having a choice between the scenarios.
Failure to make an election by 31 December 2020 would leave the obligation imposed by clause 4 unresolved.
The obligation to elect a scenario hence remained exercisable after 31 December 2020.

The court considered the terms of clauses 4 and 5 of the contract, which relevantly stated:

4. ... From the fourth year onwards, [the appellant] is entitled to request an increase in the return on his investment, or choose to take part in the company's operation and become a true 40% shareholder, or choose to leave the company, but [the appellant] is entitled to transfer the 40% equity in the 20 square kilometres to others at the then market price. In the event the sale price is for less than AUD1.5 million, [the respondent] shall make up the difference …

5. This agreement is valid from the date of signature to December 31, 2020 …

Construction of the contract

In construing these clauses, the court found that clause 4 conferred a right upon the appellant to choose between the scenarios, but not an obligation to do so. It particular, it considered the words 'entitled to' as words of right, as opposed to obligation, with the word 'choose' to be directed to the nature of the right in question. In circumstances where the appellant was not obliged to make a choice, the doctrine of election could not apply.

Consistently with the plain meaning of clause 5, the court considered that the right to choose conferred by clause 4 could only be exercised up to 31 December 2020. As clause 4 did not make it necessary for the appellant to make an election, its effect did not survive the termination of the contract.

These interpretations were consistent with the commercial purpose of both clauses, being an allocation of economic risk as between the parties (clause 4) for a fixed period of time (clause 5).

Clear and unequivocal communication

The court also considered whether there had been any conduct by the appellant, before termination of the contract on 31 December 2020, which could be taken to amount to his making a valid choice among the scenarios. To do so, it was necessary for the appellant to have communicated to the respondent words or conduct manifesting a particular choice.

The appellant contended that this communication could be in terms that were 'less unequivocal' or somewhat 'nuanced'. The court considered that 'less unequivocal' or 'nuanced' words or conduct might suffice in cases where the doctrine of election was engaged, as there would be a need to attribute a party's words or conduct to a particular choice. However, having found that clause 4 did not require an election, the court considered that the appellant was required to communicate any choice among the scenarios in clear and unequivocal terms.

The court found that there was no conduct before 31 December 2020 that could amount to a clear and unequivocal choice under clause 4. The earliest communication that might suffice to reflect a choice of scenario 3 did not occur until 2022 or 2023. Accordingly, there was no conduct before termination of the contract by which the appellant could have been said to have made a valid choice among the clause 4 scenarios.

Footnotes

Alphington Developments v Amcor Pty Ltd [2025] VSCA 48.
JPA Finance Pty Ltd v Gordon Nominees Pty Ltd [2019] VSCA 159.
Contract law update 2019: Consequences of non-compliance.
Contract law update 2023: Settlement agreements.
[2025] NSWCA 7.

Operation and interpretation of contracts

When contractual machinery fails: can courts step in?

Alphington Developments Pty Ltd v Amcor Pty Ltd [2025] VSCA 48

Sanmik Food Pvt Ltd v Alfa Laval Australia Pty Ltd [2025] NSWCA 7

Sui v Jiang (No 2) [2025] NSWCA 86

Footnotes