Australian courts adopt a context-based approach to contractual notice disputes

While precision remains important when drafting contractual notices, contractors and developers seeking timely and efficient delivery of projects should welcome this shift.

A recent 2025 decision by the District Court of New South Wales, is an example of the courts taking a more commercially minded approach. In this case, Reform Projects Pty Ltd (Reform) issued a payment claim on 22 November 2024 to Merman Investments Pty Ltd (Merman), concerning an unpaid portion of an amount, $521,207.41 (approx. US$369,275 excl. GST).

Under the contract and the Building and Construction Industry Security of Payment Act 1999 (NSW) (Act), Merman was obliged to provide a payment schedule by 6 December 2024 and then to make payment by 13 December 2024.

On 12 and 13 December 2024, Merman raised errors in Reform’s tax invoice, requesting reductions and a change of date to align with when the claim was issued. While Reform complied with those requests, Merman never paid the whole amount of the original 22 November claim. As a result, Reform brought proceedings to recover the unpaid amounts under s 15(2)(a)(i) of the Act.

During the proceedings, Merman asserted that the exchange on 12 and 13 December 2024 was a contractual agreement to withdraw the original payment claim. The judge, Montgomery DCJ, outlined the following facts as significant:  

• Merman had requested a ‘contractors tax invoice’, not a substitute payment claim;  
• in the email correspondence, both parties described the original claim as the subject of their communication; 
• neither party referred to withdrawing it; and 
• there was never a reference to a ‘revised’ original payment claim.  

The judge ruled that this correspondence did not indicate an intention to remove Reform’s rights in relation to the payment claim, based on what a reasonable bystander in the position of the parties would have understood the correspondence to mean, which required “consideration not only of the documents on their face, but also of the surrounding circumstances of which the parties were aware of and the purpose and objective of their commercial engagement”.

As a result, Merman was ordered to pay the outstanding balance of the original payment claim.   

Interpretation of contractual notices

The court's decision in Reform would be unremarkable aside from its analysis of the 12 and 13 December correspondence between Reform and Merman. This analysis reinforces earlier rulings which demonstrate that Australian courts will often take a more flexible approach when interpreting contractual notices, compared to the stricter approach usually applied to the contract being administered.

In Australia, it is well established that courts will only examine the background or surrounding circumstances to the formation of a contract where there is ambiguity in the contractual text being examined. There is an obvious logical paradox to this ‘rule’ of course, given that if there was no ambiguity in the text then there would be no dispute about its operation and no court proceeding.  Nonetheless, that approach is the settled view of the law.

When considering contractual notices, however, this ‘rule’ is more flexible. Several other cases illustrate Australian courts taking a more commonsense and commercial approach to the interpretation of contractual notices by permitting the examination of the circumstances surrounding the drafting of the notice in question.

This is based off the approach arguably adopted by the United Kingdom’s House of Lords ruling in 1997 that contractual notices should be understood using a non-technical, commonsense approach by a reasonable person equipped with the relevant facts.

In a 2005 case between Etlis and New Age Construction, the court found that an informal letter was, given the principal’s actual knowledge of the relevant circumstances, sufficient to trigger the contractor’s extension of time rights.

Similarly, the Victorian Supreme Court ruled in 2007 that a contractor’s notice regarding a latent condition was sufficient to also trigger an entitlement under an extension of time regime because it was obvious to the recipient of the notice that the contractor was going to take longer to deal with the latent condition.

In a 2024 case, the South Australian Supreme Court, whilst confirming this approach, ruled that while a contractual notice should be interpreted in the hands of a reasonable commercial person, it must still follow the substantive requirements of the contract to be valid. As a result, in that case, the relevant progress claim notice was invalid because it implied to make a claim for money which the contractor was not entitled to.

These cases, considered together, demonstrate an evident shift toward a more expansive, commercially oriented interpretation of contractual notices, consistent with the UK’s approach. It suggests a growing judicial willingness to mitigate the harshness of strict compliance with formal requirements in a contract, provided a notice achieves its intended purpose.

This is likely to benefit parties which want to rely on their correspondence as it is read and interpreted in the moment, rather than overly technical reconstructions of documents by legal professionals, years after the fact.

It is preferable to use the clause references and language forms from the contract where possible when corresponding between parties. However, if that is not possible, then using short sentences, simple words and making meaning clear will assist when determining whether the relevant contractual triggers have been met.

Co-written by Cormac Mercer of Pinsent Masons.