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CPI Adjustments in Contracts

By 26 November 2013Consumer Law
CPI Adjustments in Contracts

CPI Adjustments, Why Telstra is Suing NBN Co.

An agreement signed by Telstra Corp. Ltd. and the National Broadband Network Co. (NBN), has caused quite a stir. But why is Telstra suing NBN?

In June 2011 the companies entered into an $11.2 billion contract. The contract gives NBN Co. rental access to Telstra’s communication network composed of underground pits and ducts, this allows NBN Co. to use pre-existing infrastructure to assist in the rollout of the National Broadband Network, and is a pivotal agreement for the continued operation of the NBN.

A failure of both parties to expressly mention the year as to when to apply the Consumer Price Index (CPI) adjustments has led them to litigate. Telstra argues that the indexation should have started in January 2011, when Telstra’s Board had initially acted on the deal. However, NBN claims payment should start in January 2012, when Telstra’s shareholders ratified the contract.

The Importance of Consumer Price Index (CPI)

In general, CPI is regarded as Australia’s key measure of inflation. The CPI is used to keep track of changes in the prices of a wide range of consumer goods and services and is published quarterly.

Price indexes are used in contracts by businesses and government in monitoring and evaluating levels of inflation in the Australian economy, and making payment adjustments (Indexation Clauses). It is also used to adjust values of types of certain fixed payments like pensions and contracts.

The Current Action

Former Federal Court judge Kevin Lindgren initially heard the case in December 2012 and reached a conclusion favouring NBN Co. That decision is now being disputed by Telstra in the Supreme Court of New South Wales. It is hoped that a definitive decision will be reached prior to the end of 2014.

What’s At Stake

The value of the contract is set at $11.2 billion, the value of litigation is around $100 – $200 million.

Contracts in General

Contracts are extremely commonplace, from the boardrooms of multi-national companies to the shopping isles at the local supermarket; contracts form a part of our everyday personal and business lives. A lawyer should ideally draft important contracts, such as those for business deals, employment, large sums of money, or expensive items. Having a lawyer draft a contract means that you avoid common issues, such as using the correct language or making proper arrangements for payments. Lawbuddy offers a range of lawyers that practice in Contract negotiation, drafting, and litigation.