The significance of pre-contract negotiations

The difficulties associated with a partly oral and partly written contract were considered by the Supreme Court in an April 2019 decision involving the Fields Group, a security company based on the Central Coast with approximately 120 security guards, and the much larger Wilson Security, with approximately 7,000 security guards.

Fields Group Pty Ltd v Wilson Security Pty Ltd [2019] NSWSC 475 (30 April 2019)

The DFAT contract

In early 2015, the Fields Group became aware of an opportunity to obtain a security services contract under the Indigenous Procurement Policy. The contract required security services to be provided to the Commonwealth Department of Foreign Affairs and Trade (“DFAT”). The Fields Group did not have sufficient staff to fulfil the contract requirements, so sought expressions of interest from larger security businesses to “partner” with the Fields Group as a subcontractor.

Wilson Security lodged an expression of interest with the Fields Group, which involved a commitment by Wilson Security to subcontract work to the Fields Group.

In September 2015, the Fields Group was granted the contract to provide security services to DFAT, and Wilson Security provided security staff and logistical staff to the Fields Group accordingly (pursuant to a DFAT subcontract). At the same time, Wilson Security provided additional security services to Fields Group under Wilson Security’s own contracts.

Termination

Tensions between the parties arose in 2017. The Fields Group relied on its contractual right to terminate the contract with Wilson Security on 30 days’ notice, and all contractual relationships between the parties ended in July 2017. At the time, approximately $620,000 worth of invoices issued by Wilson Security to the Fields Group remained unpaid.

Issues

The issues for determination by the Court were soley based in contract – that is, what, on its true construction, the scope and terms of the commitment by Wilson Security was:

• The Fields Group claimed that Wilson Security was contracted to provide 68,000 hours of work annually to the Fields Group.
• Wilson Security argued that the commitment to provide work was not absolute and that it discharged its obligations, and that the commitment lasted only for as long as Wilson Security had the benefit of the subcontract for the DFAT work.

The Fields Group claimed damages for breach of contract, and conceded that it was indebted to Wilson Security for the amounts claimed but sought to set-off this liability against the damages claimed from Wilson Security. The Court noted that Wilson Security was entitled to judgment for the amounts of its unpaid invoices under the DFAT contract whether or not the Fields Group’s claim for damages for breach of contract was sustained.

The evidence

The Court reviewed evidence regarding the initial formation of the contract between the parties – including file notes of pre-contract meetings held between the parties’ representatives – in particular:

“[Fields] advised that [Wilson Security] need to provide the $2.8 million at 68K hours if [Fields] put it in the proposal as [Fields] will be held accountable. [Wilson Security] advised that they would provide that.”

The Court accepted that although there was a formal contract which covered the DFAT contract, the commitment concerning the subcontracting of Wilson Security’s work to the Fields Group was not recorded in a formal contractual instrument, in which case the parol evidence rule did not apply (that is, one cannot use evidence made prior to the written contract to contradict the writing), and the Court could look at all of the prior dealings between the parties, including undertakings and representations made orally and by conduct.

The task for the Court is to construe the dealings of the parties, taken as a whole, in order to determine what the commitment was: J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 1 WLR 1078 at 1083.

In reviewing the earlier correspondence between the parties, the Court noted that one particular letter from Wilson Security was not responded to by the Fields Group.

“There was no attempt by [the Fields Group] then or later to resolve any tensions or inconsistencies”.

In looking at all aspects of the oral conversations and written correspondence between the parties, the Court held that the Field Group’s claim for breach of contract failed, and that Wilson Security was entitled to judgment for the amount of its unpaid invoices.

Key learnings

• Pre-contract negotiations, whether oral or in written form, are important, and must be conducted as succinctly as possible. A written record of all oral discussions should be made as contemporaneously as possible (that is, as soon as possible afterwards).
• Try to be as concise as possible – the Court in this instance was critical of the “clumsy” use of certain words in the written correspondence between the parties.
• Do not ignore any inconsistencies during negotiation of terms. If there is an obvious inconsistency, then it must be addressed.