Background

Our client, the Security Company, had entered into arrangements with another company to supply work to that company as a subcontractor (Subcontractor), when the Subcontractor successfully tendered to provide security services to a government department. The Security Company was to manage the security services and provide hours to be completed by security guards employed by the Subcontractor.

The original contractual arrangements contemplated that a set number of hours would be given to the Subcontractor by the Security Company, to be completed by the Subcontractor’s guards. Ultimately, the contemplated number of hours was not available under the tender arrangements. Additionally, the Subcontractor was unable to complete the number of hours proposed to be supplied to it by the Security Company over the course of the agreement.

The Subcontractor ceased paying the invoices issued to it by the Security Company for services performed under the contractual arrangements from February 2017, and ultimately terminated the subcontracting arrangement in July 2017.

In late 2017, the Subcontractor sued the Security Company seeking damages for the amount of hours contemplated by the original arrangements. The Security Company defended the action on the basis that the number of hours contemplated was not made available under the tender arrangements, and in any event, the Subcontractor had been unable to supply sufficient guards to meet the hours the Security Company had attempted to provide. The Security Company also claimed the amount of its unpaid invoices for the period February 2017 to July 2017, which were in excess of $600,000.

On 30 April 2019, Justice Parker dismissed the claim by the Subcontractor and held that the Security Company was entitled to payment of its outstanding invoices, plus its legal costs.

The Subcontractor appealed the decision of Justice Parker to the NSW Court of Appeal. On 29 November 2019, the Court of Appeal upheld the decision of Justice Parker – holding that the Subcontractor had failed to establish that the Security Company had an obligation to provide the hours contemplated by the original arrangements, regardless of the availability of those hours under the tender arrangements.

What was the contract?

The case for both parties turned on what the terms of the contract were, in circumstances where the contract comprised several different documents rather than a single written contract. The relevant documents included:

1. a request for expressions of interest to be involved in a tender to the government department from the Subcontractor (EOI request);
2. a response from the Security Company, in which it estimated that 68,000 hours would be available through a successful tender, which could be allocated to guards employed by the Subcontractor (EOI response);
3. a tender from the Subcontractor to the government department that included, among other things, the EOI response from the Security Company;
4. a letter from the Security Company to the Subcontractor, which amended the estimate of hours from 68,000 to 54,800 and set out some commercial conditions to be met by the Subcontractor (EOI amendment);
5. a contract between the government department and the Subcontractor for the provision of security services by the Subcontractor to the government department (Government Contract); and
6. a subcontract between the Subcontractor and the Security Company, to provide security services under the Government contract (Government Subcontract).

Importantly, the Government Subcontract included the terms on which hours under the Government Contract would be subcontracted to the Security Company to cover, but not how the Security Company would then provide hours to be filled by guards for the Subcontractor. The question was whether the Security Company’s estimate of 68,000 hours in the EOI response formed part of the contract between the Subcontractor and the Security Company – that is, once the Subcontractor designated hours to the Security Company under the Government Contract, was the Security Company obliged to provide 68,000 hours of work to the Subcontractor to be completed by the Subcontractor’s guards?

Forming a contract

In order to form a legally binding contract, you do not need to have one single signed document. Contracts can be verbal or written, and their terms can comprise written contracts, other documents or letters, or conversations. In certain circumstances, their terms can be implied.

However, all contracts have four key elements:

offer;

• acceptance;
• consideration; and
• intention to create legal relations.

While contracts can take many different forms, there must be a clear offer setting out the terms of the contract, an acceptance of those terms and consideration (such as money, property or other goods or services of value). The parties must also have intended the contract to be legally binding.

In this case, the Subcontractor was seeking to rely on an estimate of hours that was given by the Security Company before any contract existed between the government department and the Subcontractor. The court held that at the time the estimate was given, the Subcontractor could not have provided any consideration for it because it did not yet have the contract with the government department under which it could subcontract hours to the Security Company. Additionally, if the estimate was taken to be binding, it would have created a situation where the Subcontractor was entitled to 68,000 hours of work from the Security Company – whether or not it had a contract with the government department. The court regarded this argument as commercially absurd and the parties could not therefore have intended that the estimate of 68,000 hours was to be legally binding on the Security Company.

Accordingly, no contractual obligation existed for the Security Company to provide 68,000 hours of work to the Subcontractor, and the court dismissed the Subcontractor’s claim.

Key messages

It is important to be aware of which commitments may be contractually binding, and which ones may not. It is not necessary to have a formal written contract in order to be bound by the terms of the contract.

Instead, it is important to consider whether an agreement has been reached between two parties, and whether that agreement involves the exchange of consideration. Additionally, parties should consider whether they each intend to create a legally binding agreement. In commercial contexts, it is very difficult to displace the presumption that a legally binding agreement was intended.

We are pleased to have helped the Security Company defend itself and recover the losses caused by the Subcontractor. If you require any assistance in dealing with a contractual dispute, or if you have any queries about your obligations under an agreement, please contact Radhika Kanhai or Stephanie Davies on +61 3 9608 2000.

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.