A recent Supreme Court decision highlights just how important it is for contracting parties to carefully consider potential risks and ensure those risks are appropriately addressed in the contract (Ayers Rock SkyShip Pty Ltd v Voyages Indigenous Tourism Australia Pty Ltd  NSWSC 82).
Ayers Rock SkyShip Pty Ltd (ARS) entered into an operator agreement (the Operator Agreement) with Voyages Indigenous Tourism (Voyages) to conduct a business providing rides in the gondola of a tethered helium balloon near Uluru (SkyShip Business).
The Operator Agreement provided that ARS was required to conduct the SkyShip Business during normal business hours throughout the term of the contract. Voyages had the right to terminate the Operator Agreement if ARS breached any of its terms and did not remedy that breach within 14 days of receipt of a breach notice.
The Operator Agreement did not include any provision about the parties’ obligations if ARS was unable to conduct the SkyShip Business due to, for example, damage to the balloon.
The winds of change
The SkyShip Business commenced operation in August 2018. However, in October 2018 high cross-winds destroyed the helium balloon, halting the operation of the SkyShip Business (October 2018 Incident).
Following the October 2018 Incident, ARS informed Voyages that it would be unable to resume the SkyShip Business for approximately 9 months.
Voyages issued a default notice under the Operator Agreement (the Default Notice) asserting that ARS was in breach of its obligations in failing to operate the SkyShip Business and requiring ARS to recommence that business within a short period of time.
ARS was unable to recommence the business in time. Voyages then issued a termination notice under the Operator Agreement.
ARS then issued proceedings with the main issue being whether its failure to operate the SkyShip Business after the October 2018 Incident constituted a breach of the Operator Agreement entitling Voyages to terminate.
Bursting the balloon
ARS argued that:
its inability to operate the SkyShip Business was not a breach of the Operator Agreement because, on its true construction, the obligation to conduct the SkyShip Business only applied within ordinary circumstances, and the October 2018 Incident was an exceptional circumstance not within the scope of the provision;
- a reasonable business person would not have understood the Operator Agreement to require ARS to operate the SkyShip Business in the exceptional circumstances that arose; and
- it would be manifestly uncommercial to construe the Operator Agreement as imposing an obligation to operate the SkyShip Business on an uninterrupted basis and without regard to the exceptional circumstances precluding its safe operation or rendering the business inoperable.
The Court rejected these submissions and sided with Voyages, finding that:
- the language of the clause requiring ARS to operate the SkyShip Business, viewed in the context of the whole agreement and in the light of the surrounding circumstances known by both parties when the agreement was made, should not be read as including a qualification that the business only operates in ordinary or unexceptional circumstances;
- to construe the Operator Agreement as ARS contended would add a significant gloss on otherwise clear words and introduce uncertainty as to the scope and operation of the agreement;
- in drafting the Operator Agreement the parties chose not to deal expressly with events of frustration or force majeure despite such provisions being not uncommon in other contracts generally;
- there was nothing commercially irrational or absurd in ARS agreeing to assume the risk of events such as the October 2018 Incident in circumstances where ARS was the only party to the contract which had any actual knowledge of the potential threats to the SkyShip Business; and
- as ARS did not conduct the SkyShip Business after the October 2018 Incident in accordance with the terms of the Operator Agreement, it was in breach of clause 4.1 entitling Voyages to terminate the agreement.
How we can help?
This case highlights the importance to contracting parties of carefully considering risks, negotiating how those risks should be borne and clearly recording those matters in any commercial contract.
We can assist you in negotiating and drafting commercial contracts which are clear in the terms and properly protect you by plainly defining where risks should fall and what should happen if the risks eventuate. A well drafted contract could be the difference between your business being a soaring success or a burst bubble!
For more information, please contact Stephen Polczynski or Claire Latham on 02 9234 1500.