The Federal Court decision of ACN 168 479 614 Pty Ltd (formerly known as Steller Developments Pty Ltd) (in liq) (Receivers & Managers appointed) v Smedley, in the matter of ACN 168 479 614 Pty Ltd (No 3) [2025] FCA 132 (Steller Case) examines the principles of construction of a contract and rectification. It is a salient reminder to take care in drafting documents as the Court will not lightly exercise its powers to correct a document whether by construction or formal rectification.
Background
On 2 February 2017, Steller Developments Pty Ltd (Steller Developments) entered into a Master Facility Deed. Steller Developments acted in a dual capacity as both the Issuer of the notes and the Guarantor.
In March 2017, the co-founders and former directors of Steller Developments (respondents in these proceedings) executed a Deed of Guarantee (March Guarantee Deed). Under the March Guarantee Deed, the respondents guaranteed the obligations of Steller Investment Notes Pty Ltd (SIN), who was expressly named as the “Issuer”.
On 31 January 2020, Steller Developments entered into liquidation.
The liquidators of Steller Developments brought proceedings seeking:
- a declaration that on a proper construction of the March Guarantee Deed, the term “Issuer” meant Steller Developments, not SIN;
- alternatively, an order for rectification of the March Guarantee Deed amending the definition of “Issuer” to Steller Developments on the basis that this was the common intention of the parties; and
- judgment against the respondents for more than $100 million.
Issue
The issues before the Federal Court were:
- what was the proper construction of the March Guarantee Deed; and
- should orders for rectification be made?
Construction Issue
Principles
The Court reaffirmed that the correction of drafting errors through construction is permitted only where both of the following conditions are satisfied:
- the literal meaning of the contractual words is an absurdity not ambiguity; and
- it is self-evident what the objective intention is to be taken to have been.
Application
The Court rejected the Steller Developments’ construction argument.
Instead, the Court found that there was no absurdity in the March Guarantee Deed’s wording that require judicial correction for three reasons. First, the March Guarantee Deed clearly defined “Issuer” as SIN, and its provisions were capable of operating as a guarantee of SIN’s obligations in respect of notes issued under an information memorandum issued in connection with another transaction.
Second, there was no concession that the Master Facility Deed and the March Guarantee Deed formed part of a single integrated transaction. Accordingly, the Court found no absurdity in the March Guarantee Deed’s terms and did not accept the premise that the March Guarantee Deed was objectively intended to guarantee obligations under the Master Facility Deed.
Third, while there were some drafting curiosities in the March Guarantee Deed (i.e. different references to the “Issuer” in recital A and in the operative clause), it was far from self-evident that the respondents’ objective intention was to provide a personal guarantee of the obligations of Steller Developments as opposed to SIN.
Rectification Issue
Principles
The Court stated that rectification is an equitable remedy which is available upon proof of:
- a prior common intention of the parties to an instrument; and
- such intention was continuing at the time of the execution of the instrument; and
- there is a common mistake made which causes the intention not to be reflected in the instrument as executed.
Application
The Court dismissed the claim for a rectification order and found that Steller Developments had not established any pre-existing agreement evidencing a common intention shared with the respondents. In the absence of such evidence, there was no basis to conclude that the parties were mistaken in recording their agreement.
Key Takeaways
The threshold is high for judicial correction of a document, whether by construction or rectification.
Correction of a document by construction will only be permitted where the language produces a clear absurdity and the parties’ objective intention is self-evident. The Court will not infer a mistake simply from drafting imperfections, ambiguities, or inconsistencies in a document. Further, the Court will not engage in any impermissible speculation or travel beyond the limits of the Court’s powers to resolve errors by construction.
A party seeking rectification of a document bears the onus of proving with clear and convincing evidence that there was a prior common agreement which was mistakenly recorded in the document. This can be difficult to prove.
If you would like to discuss this article with us, please contact David Greenberg, partner, or Mengting Wang, Associate on (02) 9261 5900.