Avoiding unpleasant surprises: incorporation of terms into contracts after Surfstone Pty Ltd v Morgan Consulting Engineers Pty Ltd [2016] QCA 213

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By Scott Laycock, Partner, Andrew Wallis, Partner, Peter Meades, Partner, Ziv Ben-Arie, Partner and Scott Higgins, Partner

Summary

If you sign a contract where some of the contract terms are not contained in the contract but identified as being set out in a separate instrument, such as industry guidelines, then Surfstone reinforces the current position in the law that those referenced terms in the separate instrument are incorporated in, and form part of, the contract you have signed.  In Surfstone, as will be seen below, that position had a devastating effect on the injured contracting party.

Facts:

  • Morgan Consulting Engineers Pty Ltd (Morgan) provided engineering services for Surfstone Pty Ltd (Surfstone), who were the owners of a distribution warehouse building, the subject of the works.
  • The parties signed a contract which stated “The commission would be generally in accordance with the ACEA Guideline Terms of Agreement”. ” (ACEA Guidelines). The ACEA Guidelines were not attached to the Fee Proposal.
  • Relevantly, the ACEA Guidelines included a statement that the consulting engineer (Morgan) would be “discharged from all liability in respect of the services…..on the expiration of one year from the completion services.”
  • Approximately 5 years after the completion of the warehouse, some deflection in the concrete floors became apparent indicating a serious structural design defect.
  • Surfstone commenced proceedings against Morgan some 9 years after the last invoice was submitted.
  • Morgan relied upon the terms of the ACEA Guidelines as a time bar in defence of Surfstone’s claim; however Surfstone contended that the Guidelines did not form part of the contract.

Surfstone’s Arguments

Faced with the prospect of its entire claim against the engineers being time barred by the ACEA Guidelines, Surfstone argued that:

  • the words used in the fee proposal were too general and imprecise to incorporate the Guideline Terms;
  • the words “generally in accordance with” suggested that not all of the Guideline Terms were incorporated, and if that was so, one could not confidently say which ones were, and which ones were not, incorporated;
  • the words are found in a section of the Fee Proposal that only dealt with fees, therefore a reasonable person would think that if anything at all was incorporated it might be the terms as to fees, but no more, and certainly not a liability exclusion clause like clause 4.3; and
  • given the uncertainty and imprecise language, none of the Guideline Terms should be considered to be incorporated.

Finding:

The Court focused on the natural and ordinary meaning of the specific words, “the commission would be generally in accordance with the ACEA Guideline Terms of Agreement” and in doing so, rejected the arguments from Surfstone.

In his Judgment, His Honour Morrison JA held (McMurdo J and Atkinson J agreeing) that the ordinary meaning of the word “commission” includes: the entrusting of matters to be performed. It followed, in His Honour’s assessment, that the word “commission” must have been objectively intended to refer to the contract for the whole of the services to be provided by Morgan, and did not only refer to the fees.

Regarding incorporation of the ACEA guidelines [at 48]:

“In my view, a reasonable person would read the proposal as meaning that Morgan’s offer to perform the structural and civil engineering was on the basis that their contract would be governed by the ACEA Guideline Terms, as well as or modified by, any terms set out in the proposal.

The Court formed the view that, once the above is taken into account, the words “generally in accordance with” did not introduce an unacceptable level of uncertainty.

It was also necessary for his Honour to determine whether or not the term (limiting liability) would be anticipated in such a contract. In this respect, His Honour held [at 68]:

In my view, those circumstances mean it would not be surprising at all to find that the design engineer wished to insert clauses in the contract, limiting the design engineer’s liability and the scope of warranties.”

The result was that Surfstone had no right of recourse whatsoever in respect of the costs of rectifying the allegedly structurally deficient building.

Impact:

Prospective or current parties to a contract, particularly participants in the building industry, ought to take note that the specific details of any documents or standards that are expressly referred to in a contract will likely be incorporated into its terms.

This case provides a stark reminder to parties to ensure they check all the terms of documents that are referenced.

Parties should proceed on the basis that any guidelines and standards referred to in a contract is likely to be binding. Failure to conform with the terms of these guidelines or standards, whether or not they are expressly incorporated may result in an unintentional breach.

The case also serves as a salient example of why it is dangerous for Principal’s to accept fee proposals or tender responses without entering into a subsequent binding contract on clear terms.

For further information, please do not hesitate to contact us.

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