Statutory demands and disputes regarding the meaning of a contract09 July 2019 Topics: Insolvency and restructuring, Litigation and dispute resolution
A recent court decision considered whether arguments about the meaning of the contract constituted a genuine dispute for challenging a creditor’s statutory demand for payment of debt.
Universal Property Group
The matter of Universal Property Group Pty Ltd  NSWSC 796, involved a put and call option. The vendor issued a statutory demand to the developer for $1,800,000, being alleged unpaid instalments of the call option fee.
The developer contended there was a dispute as to the meaning and application of the contract, resulting in a genuine dispute as to whether the amount claimed in the statutory demand was in fact a debt due and payable by the developer under the contract.
The legal principles
The Court identified the following legal principles on a statutory demand application where there is a dispute as to the interpretation of the contract:
- It is usually inappropriate for the court to attempt to decide competing contentions as to contractual interpretation.
- If the disputed question of contractual interpretation is arguable, there will be a genuine dispute as to the existence of the debt.
- Where the legal argument is so ‘patently feeble’ that it has no basis, then there will be no genuine dispute.
- The existence of a genuine dispute may range from a clear conviction that the debt does not exist, to an opinion that the genuine dispute hurdle has only just been cleared.
The Court said that where there are clearly arguable alternatives as to the meaning of a term and related questions of construction, this, of itself, gives rise to a genuine dispute and no attempt should be made to determine the question on an application to set aside a statutory demand.
Having reviewed both sides of the argument, the Court concluded that the developer’s interpretation of the contract was arguable and did not fall within the description of ‘patently feeble’. This was sufficient for the developer to clear the low hurdle of what is necessary to establish a genuine dispute as to whether the alleged debt is due and payable.
The vendor, in arguing that there was no genuine dispute, placed emphasis on construing the contract having regard to commercial sense, implied terms of business efficacy, the sophistication of the developer and the post contractual conduct of the parties consistent with the vendor’s construction of the contract.
In relation to the vendor’s submissions, the Court observed the following in relation to a statutory demand application:
- If you have to rely on such matters to support your interpretation of the contract, then this should be taken as an indication that the low threshold has been satisfied in respect of establishing a genuine dispute.
- This does not detract from the prospect that a court may find such considerations weighty, or even determinative, when ultimately determining the construction of the contract.
- A court will almost certainly not have regard to such matters when examining a contract in the limited exercise it is required to undertake on a statutory demand application.
The statutory demand was set aside, and the vendor was ordered to pay costs.
It is clear that a statutory demand should not be issued where there are clearly arguable alternatives as to the meaning of a term and related questions of construction of the contract that are relevant to the issue of whether the alleged debt is due and payable.
In circumstances where there is an arguable dispute as to the construction of the contract, early notice of the grounds of dispute should be given to the alleged creditor to guard against a statutory demand being issued.
If you would like more information about these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.