KEYWORDS: GOOD FAITH NEGOTIATIONS

KEY TAKEAWAYS

An agreement to act reasonably and in good faith may be sufficiently certain to be enforceable. The precise nature and extent of the obligations will be determined by reference to the relevant contractual terms and the facts.

Facts

The case concerned the development and lease of a Masters Home Improvement store in Bendigo for Woolworths Limited (Woolworths). North East Solution Pty Ltd (NES) agreed to develop the store for Woolworths and then lease it to Masters Home Improvement Australia Pty Ltd (Masters) for at least 12 years.

The main provision of the Agreement for Lease (AFL) in dispute was clause 2.2, concerning the determination of the extra cost of building a Masters store instead of a Bunnings Store (the Landlord's Work Costs).

The AFL could only be terminated under clause 2.2(c) if the parties, acting reasonably and in good faith, were unable to resolve any disagreement that arose in relation to the Landlord's Work Costs. In May 2010, Woolworths purported to terminate on this basis.

The plaintiff's claim

NES submitted that there was no genuine disagreement, or alternatively that Woolworths had not acted reasonably or in good faith to resolve it. NES argued that Woolworths took into account various commercial factors:1

  • an inability to bring the costs within its budget;
  • perceived opposition by the Council and residents;
  • the belief that NES had funding issues; and
  • the desire to pursue an alternative site,

none of which were valid grounds on which the AFL could be terminated.

The defendant's claim

Woolworths argued that NES could not succeed unless it could show conduct on the part of either defendant which "offends conscience" or was otherwise "wholly unreasonable" in the circumstances.

It also argued that clause 2.2 of the AFL was merely an agreement to negotiate with no enforceable outcome.

Decision

Croft J found that Woolworths was not free to terminate the AFL. Clause 2.2 of the AFL was "not an agreement merely to negotiate" but "an agreement to act reasonably and in good faith in an attempt to resolve differences in relation to the estimate by NES of the Landlord's Work Costs."2

Act in good faith

Croft J referred to the following general propositions regarding the requirement to act in good faith:

"[T]he authorities establish that an agreement to negotiate 'reasonably' and 'in good faith' is sufficiently certain to be enforceable."3

His Honour referred to Allsop CJ's judgment in the Full Court of the Federal Court in Paciocco v Australia and New Zealand Banking Group Ltd as a reaffirmation of the elements of the obligation to act in good faith:

"That a normative standard is introduced by good faith is clear. It will, however, not call for the same acts from all contracting parties in all cases ... The contractual and factual context ... is vital to understand what, in any case, is required to be done or not done to satisfy the normative standard."4

In respect of the obligation to act "reasonably", his Honour determined that while there was overlap, it should not be conflated with the obligation to act in good faith. However, the content of each obligation depends on the contractual terms and circumstances.5

Enforceability of the obligation

Croft J determined that Woolworths' argument that clause 2.2 of the AFL was an unenforceable "agreement to agree" was overly narrow. The position ignored the factual circumstances, as well as the contractual requirement that the cost difference be determined by NES and verified by Woolworths' surveyors.6

Application to the facts

Croft J identified seven steps that a reasonable person in Woolworths' position would be required to take to resolve their differences:7

  1. Invite NES to participate in the review process;
  2. Inform NES of any differences identified in relation to calculation of the Landlord's Works Costs;
  3. Communicate to NES the basis of any claim that the Landlord's Work Costs were "too high";
  4. Assist NES in obtaining alternative quotes;
  5. Provide reports identifying the basis of the differences in the parties' quotes;
  6. Communicate the contents of the reports it relied on for its quote to identify differences; and
  7. If applicable, postpone negotiations until the review process had been completed to allow all parties to consider reports relied upon.

Croft J found that, on the evidence, Woolworths had not taken any of these steps. Instead, in breach of clause 2.2, it had not acted reasonably and in good faith in resolving its differences with NES, and so terminated the AFL for reasons that were not permitted.8

"The evidence ... discloses, in my view, a continued unwillingness on the part of Woolworths to communicate to NES any differences that it may have had in relation to the estimate by NES of the Landlord's Work Costs or of Masters' contribution to those costs."9

Loss and damage

Croft J held that as a result of Woolworths' breach, NES had lost a unique and valuable opportunity (to develop and lease the site to Masters).10

His Honour ordered judgment for NES for damages of $10.875 million plus interest, based on the value of rent over the life of the lease and the expected value of the property at the end of the lease, (with a 25 per cent discount applied to reflect the inherent risks).11

http://www.austlii.edu.au/cgi-bin/ sinodisp/au/cases/vic/VSC/2016/1.html

Footnotes

1 At [169]
2 At [243]
3 At [56]
4 (2015) 321 ALR 584, at [290]
5 At [72]
6 At [79]–[81]
7 At [244]
8 At [247]
9 At [208] and [375]
10 At [259]
11 At [345]–[346] and [391]

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