In Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd & Ors [2021] VSCA 69 the Victorian Court of Appeal considered whether the prevention principle must arise as result of a breach of the contract/implied duty to cooperate or operates independently as a concept removed from the contract.

Background

In early 2015, Key Infrastructure Australia Pty Ltd (KIA) (a property planning, engineering and development company) identified a potential development site in Port Melbourne. KIA approached the applicant (Bensons), an experienced property developer, to participate in the development.

KIA and Bensons subsequently entered into a development management agreement (the DMA) whereby Bensons would acquire the site and KIA would, amongst other things, procure the Planning Permit. In return, Bensons would pay KIA a management fee of $2 million in four instalments (the Development Fee). KIA’s entitlement to payment depended on the Planning Permit being issued by 31 December 2016 (the Sunset Date). If KIA failed to meet the deadline, any instalment that had been paid would have to be repaid and the DMA would terminate.

In June 2015, KIA applied to the City of Port Phillip (the Council) for the planning permit. By May 2016, it became apparent that the Council might further delay or refuse to issue the Planning Permit. The applicable legislation entitled KIA to appeal a decision by the Council (which would include a refusal to make a decision) to VCAT, which would then stand in the shoes of the Council in determining whether the permit should be issued.

On 18 May 2016, Bensons wrote to KIA saying that any application to VCAT made by KIA would be a breach of the DMA (the 18 May 2016 Letter). However, KIA had already applied to VCAT for orders directing the Council to issue the permit. After receiving the 18 May 2016 Letter, KIA withdrew its application, but subsequently reinstated it on 5 July 2016.

On 22 December 2016, VCAT made orders directing the Council to issue the Planning Permit. On 6 February 2017 — after the Sunset Date — the Council issued the Planning Permit. KIA sought payment of the balance of the Development Management Fee, but Bensons refused to pay it on the basis that the Planning Permit was not issued by the Sunset Date. The parties subsequently fell into dispute as to whether the planning permit was issued for the purposes of the DMA when VCAT ordered the Council to issue the permit, or when the permit was actually issued by the Council.

Trial Division

The primary judge held that the planning permit was not issued by the Sunset Date. However, his Honour found that the 18 May 2016 Letter induced KIA to withdraw its application in VCAT and, as a result, Bensons had breached its duty of co-operation and prevented KIA from securing the issue of the Planning Permit by the Sunset Date.

Bensons appealed seeking to overturn the findings that it prevented KIA from securing the issue of the Planning Permit by the Sunset Date and breached the implied term to cooperate in the DMA.

Implying a duty to co-operate or a duty of good faith

The Court of Appeal accepted that a duty to co-operate arises as an implied term of the contract but found that the duty was limited and did not impose a positive obligation on Bensons to act in good faith or otherwise assist KIA in obtaining the planning permit. Instead, adopting the principles in Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201, the Court of Appeal observed that “the implied duty to cooperate does not impose a duty to act generally in the other party’s best interest, nor can it be used to impose an obligation which would be commercially advantageous but for which the contract does not provide”.

The Court of Appeal further concluded that “it was not open to imply a duty of good faith into the contract… because KIA failed to establish that an obligation of good faith was necessary in the sense explained in BP Refinery”. Accordingly, the Court found that Bensons had not breached the DMA by issuing the 18 May 2016 Letter.

Prevention principle

The Court of Appeal allowed the appeal and found that the prevention principle applies only with reference to the DMA and the contractual obligations it imposed on the parties. That is, the prevention principle cannot be considered as a freestanding principle of law without reference to the contract, and the breach of the terms of that contract – including the implied duty to co-operate. In doing so the Court firmly stated that “it is an error to consider the prevention principle divorced from the terms of the contract and it is a breach of a contractual term that gives rise to the potential application of the principle”.

Takeaways

In Victoria the Courts have been less willing to apply the prevention principle on the basis of an implied duty of good faith. Whereas, in New South Wales, the position is that an implied duty of good faith may be a basis for enlivening the prevention principle.

The decision highlights the Victorian approach to applying the prevention principle. That is, that there must be a breach which is the operative reason for a party to the contract being prevented from fulfilling its contractual obligations – this includes a breach of an implied duty to co-operate.

Angelo Germano

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