Australia: A bridge too far: Victorian decision on contractual duty of good faith overturned

In the recent decision of Masters Home Improvement Pty Ltd v North East Solutions Pty Ltd [2017] VSCA 88, the Victorian Court of Appeal provided further guidance in relation to how a contractual duty of good faith operates.

North East Solution Pty Ltd (NES) had entered into an Agreement for Lease (the Agreement) with Masters and its parent company Woolworths, with Woolworths providing a guarantee for Masters' obligations. The Agreement set out that NES was to construct a hardware store at its own cost (the Landlord's Works Costs), and provided for the grant of a lease for an initial period of 12 years, followed by a number of options exercisable at Master's discretion.

The Agreement set out that NES and Masters "acting reasonably and in good faith" must attempt to resolve any differences they may have in relation to:

  • the determination of the Landlord's Works Costs
  • the amount that Masters must contribute to the Landlord's Works Costs and the manner in which this contribution will be made.

A further provision provided for termination of the Agreement where the parties could not agree on the Landlord's Works Costs by the later of two dates. The parties could not settle the costs and the Agreement was terminated. NES commenced proceedings alleging that Masters and Woolworths had breached their obligation to act reasonably or in good faith to resolve the disagreement and had terminated for ulterior reasons.

At first instance, the trial judge found that the express requirement to act reasonably and in good faith to resolve differences was sufficiently certain to be enforceable and that Masters and Woolworths had breached this obligation. Woolworths was ordered to pay $10.875 million in damages to compensate NES' lost opportunity in developing and leasing the site for the duration of the lease.

Masters and Woolworths appealed on a number of grounds relating to both liability and quantum, however the content of the obligation to act reasonably and in good faith was not in dispute. The Court of Appeal summarised the duty to encompass the following obligations:

  • to act honestly and with fidelity to the bargain
  • not to undermine the bargain or the substance of the contractual benefit bargained for
  • to act reasonably and with fair dealing having regard to the interests of the parties and to the provisions and objectives of the contract, objectively ascertained.

After a detailed review of the evidence, the Court of Appeal found that there was not a "sufficient basis" for the judge's findings, and in turn, the conclusions as to the inferences the judge should draw. The Court of Appeal overturned the trial judge's decision that Woolworths and Masters had breached the contractual duty of good faith.

Significantly, the Court of Appeal rejected the trial judge's suggestion that a reasonable person in the position of Woolworths and Masters would have:

  • informed NES of "any other expectations" Woolworths may have had in relation to the Landlord's Works Costs
  • assisted NES to identify and obtain alternative quotes.

The Court of Appeal found that such steps would "take the obligation to act reasonably and in good faith too far".

How a party performs their obligations of good faith will obviously be driven and informed by the relevant circumstances, however the Court of Appeal has helpfully provided some guidance for the intermediate courts when it comes to assessing such acts.

The recent decision provides a valuable reminder that care should be taken when including an express obligation to act reasonably and in good faith in a contract. As always, a term that imposes such an obligation should clearly express what type of performance the duty requires of each party in order to be satisfied.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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