What was this case about?

Bensons Property Group Pty Ltd (Bensons) and Key Infrastructure Australia Pty Ltd (KIA) were developing a commercial property together, with KIA taking responsibility for securing a planning permit from the local council within an agreed timeframe. It proved necessary for KIA to petition the VCAT for the planning permit to be issued. Unfortunately, by the time KIA did so, it had run out of time.

Bensons had indicated it would support KIA, financially, through any such proceedings. However, ultimately, Bensons had not contracted to do so unconditionally. Instead, Bensons made it difficult for KIA; claiming KIA’s conduct of the proceedings were in breach of contract and threatening to terminate.

At first instance, the Victorian Supreme Court found Bensons breached an implied duty to cooperate with KIA. The Court of Appeal overturned that judgment, finding that Bensons’ belligerent behaviour did not in fact impede KIA’s performance of the contract. With friends like these, who needs enemies?

Case study

KIA had identified a Port Melbourne property as a potential development site and entered into contracts with the owner and the tenant to acquire the site and the business operating there (an IGA supermarket). In June 2005, KIA applied to the City of Port Philip (council) for a planning permit for a new three-storey development.

In February 2016, KIA approached Bensons to join the project; seeking to benefit from Bensons’ experience with large-scale property developments. By 5 April 2016, the parties had executed a development management agreement (DMA). Essentially, Bensons agreed to acquire the site and the business directly from the owners, while KIA agreed to procure the issue of the planning permit by 31 December 2016 (sunset date) in return for a management fee of $2 million, payable over four instalments; which had to be repaid to Bensons if KIA did not obtain the planning permit by the sunset date.

In negotiating the DMA, KIA made clear to Bensons that the council might delay or refuse the issue of the planning permit and an application to the Victorian Civil and Administrative Appeals Tribunal (VCAT) may be necessary to expedite the project. Bensons was willing to fund the legal costs in making that application, if required, but a clever lawyer acting for Bensons drafted the DMA so as to make that funding conditional upon Bensons electing to appeal the council’s decision (without being obliged to do so).

After the council had delayed making a decision for some time, KIA was intent on applying to the VCAT for orders to issue the planning permit and asked Bensons to cover the costs of those proceedings. Bensons refused. It asserted, by letter dated 18 May 2016, that KIA would be in breach of the DMA if KIA commenced the proceedings itself; in which case Bensons would immediately terminate the DMA for default (18 May letter). KIA had in fact lodged an application with VCAT that day and promptly withdrew it the same day.

After some heated discussion with Bensons over the course of 7 weeks, KIA re-lodged its VCAT application and was ultimately successful. Bensons issued several default notices to KIA during these proceedings, claiming KIA failed to keep Bensons adequately informed of progress. On 22 December 2016, the VCAT ordered that: ‘a permit is granted and directed to be issued’ for the site. KIA then invoiced Bensons for the balance of the management fee.

Bensons refused to pay KIA’s invoice, contending that the VCAT orders did not constitute 'the issue of the planning permit' which the DMA required to be issued by the council. While the council eventually issued the permit on 6 February 2017, Bensons wrote to KIA on 9 January 2017 (after the sunset date) demanding the repayment of the management fee instalments.

KIA commenced court proceedings seeking to recover the balance of the management fee. Bensons counterclaimed for recovery of the instalments. The trial judge found that the permit had not been issued in time (VCAT orders directing the permit to be issued were not enough) but held that Bensons had prevented KIA from meeting the deadline by breaching an implied duty to cooperate. However, KIA’s losses were fully mitigated by the proceeds from the sale of the site and business so the trial judge only awarded nominal damages. Bensons appealed, on the grounds considered in this case study.

The Agreement

The DMA required KIA to ‘perform the Development Management Services [which were defined as including: ‘Procure the issue of a Planning Permit in accordance with and pursuant to the Planning Application’] at its own cost, expeditiously and with all due care, skill, judgement and attention’. KIA was also required to ‘keep Bensons fully and regularly informed as to the status and progress of performance of the Development Management Services’.

In return, Bensons was required to pay KIA the development management fee by instalments (subject to certain conditions): the first two instalments were payable on signing the DMA, the third and fourth instalments were payable on the issue of the planning permit and the settlement of the sales contracts for the site and business, respectively.

Clause 2.3 of the DMA relevantly provided:

(d) If the Development Management Conditions are not satisfied by the Sunset Date, [KIA] must repay to Bensons the First Instalment, the Second Instalment and if applicable the Third Instalment in full within 14 Business Days. Time is of the essence.

(e) If Bensons elects (without being obliged so to do) to appeal any decision of the Responsible Authority in connection with the Planning Application or the issue of the Planning Permit, all costs in doing so are to be borne by Bensons.

The Development Management Conditions included ‘the issue of a Planning Permit’ and, as noted, the Sunset Date was 31 December 2016.

The DMA provided that the term of the agreement would end on the earlier of:

• the Sunset Date; and
• the completion of all Development Management Services, including satisfaction of all Development Management Conditions.

The Judgment

On appeal, Bensons claimed that the trial judge had erred in finding that Bensons breached an implied duty to cooperate in the DMA; in particular by overlooking the evidence about what KIA actually did and why, after receiving the 18 May letter.

The trial judge was convinced on the evidence that Bensons no longer wished to proceed with the project and that it was taking positive steps to prevent KIA from performing its obligations under the DMA. Accordingly, the trial judge found that KIA failed to obtain the planning permit by the sunset date because of the time lost in withdrawing and re-lodging the VCAT application, and that Bensons’ 18 May letter was objectively likely to bring about that outcome, which in fact it did.

However, the Court of Appeal found as a matter of fact that the real reasons KIA was concerned to stay out of the VCAT were the risks associated with its application and the costs that KIA had to bear. The court relied on evidence demonstrating that KIA was considering a number of different legal opinions from numerous barristers, before re-lodging its VCAT application, and continuing to petition the council for the planning permit in parallel.

The courts (both at first instance and on appeal) held that KIA’s performance of its obligations did not require any consent or approval from Bensons, and that Bensons had misinterpreted the DMA by asserting otherwise in its 18 May letter.

While the trial judge found that Bensons caused panic that dissuaded KIA from continuing its VCAT application, the Court of Appeal considered Bensons’ actions (though ‘hard-nosed and belligerent’) did not prevent or hinder KIA from reinstating its VCAT application and KIA’s contention that the planning permit would have been issued by the sunset date had the initial VCAT application remained on foot was entirely speculative.

The Reasons

Bensons submitted that an implied duty to cooperate is only breached when the impugned conduct renders satisfaction of contractual conditions impossible. In GR Securities,^[1] McHugh JA referred to the principle that ‘[w]here one party to a contract makes it impossible for a condition of the contract to be fulfilled, the condition is taken as satisfied’.^[2]

However, the High Court has repeatedly expressed the implied duty to cooperate as requiring the parties ‘not to hinder or prevent the fulfilment of the purpose of the express promises made in the contract’.^[3] The Court of Appeal considered that ‘hinder or prevent’ describes conduct that impedes but does not necessarily render performance impossible. Further, the Court of Appeal summarised the nature of the duty as follows:^[4]

Generally speaking, a party to a contract must not engage in conduct that prevents the other party from enjoying the benefit of the contract.^[5] In some cases, where the preventative act has prevented a party from meeting a contractual time limit, the principle has operated to convert a fixed time limit to one requiring the act to be done within a reasonable time.^[6]

The Court of Appeal observed some contention amongst the authorities as to whether the duty to cooperate arises from:

• the general law of contract (i.e. a universal rule of construction);^[7] or
• as an implied term, which is subject to the test of necessity and cannot be inconsistent with any of the express terms of the contract,^[8]

and favoured the latter rationale having recently reached the same conclusion in another case.^[9]

The Court of Appeal stressed that the impugned conduct must be measured against the obligations of the contract, and was critical of the trial judge for having focused his attention only on the consequences of the relevant conduct without analysing any antecedent breach:^[10]

The findings of the judge considered as a whole entail that Bensons deliberately advanced an erroneous construction of the DMA in order to steer KIA off course and delay the issue of the permit… In our view, the judge was wrong to frame conduct of that kind as a breach of the duty to cooperate. KIA was well able to, and did, form its own view about whether the development management fee was payable if the permit was issued on the order of VCAT — it did not need Bensons’ cooperation to construe the DMA.

The Court of Appeal observed that KIA might have argued its case on the basis of anticipatory breach and a repudiation of the contract. Courts have recognised that a claim for repudiation may arise if an erroneous construction of a contract results in the party failing to do that which the contract requires, evincing an intention no longer to be bound by the contract or to fulfil the obligations in a manner substantially inconsistent with the contract.^[11]

However, in this case, the Court of Appeal indicated that it would not have upheld those arguments as Bensons’ erroneous construction of the DMA had no impact on KIA’s ability to perform its obligation; calling in aid the aphorism of Asquith LJ that an unaccepted repudiatory breach is ‘a thing writ in water’^[12].

Key takeaways

An effective working relationship between the parties is always an essential ingredient in any successful venture. Government entities, in particular, often lean on relationships with suppliers to successfully deliver government programs; turning to litigation only as a measure of last resort.

However, when relationships fail and the parties need the judiciary to uphold their rights and interests, a court might not be particularly concerned with how friendly the parties were to each other; focusing instead on the proper application of Australian law in the circumstances of each case.

If maintaining strong working relationships with contractors comes at the expense of compromising your contractual rights or results in you breaching your contractual obligations, you should not necessarily expect the judiciary to come to your aid if or when your contractors no longer value that relationship.

Finally, it is important to note that the Court of Appeal found that the duty to cooperate arises as an implied term, which makes it subject to the test of necessity and the requirement that it cannot be inconsistent with any of the express terms of the contract. This will limit its application in many circumstances.

^{[1] GR Securities Pty Ltd v Baulkham Hills Private Hospital Pty Ltd (1986) 40 NSWLR 631, 637 (McHugh JA).}

^{[2] Ibid 637 (citations omitted), citing, amongst others, Mackay v Dick (1881) 6 App Cas 251, 270 and Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 441.}

^{[3] Peters (WA) Ltd v Petersville Ltd (2001) 205 CLR 126, 142 [36]; [2001] HCA 45 (Gleeson CJ, Gummow, Kirby and Hayne JJ) (‘Peters’)..}

^{[4] Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69, 102 – 104 (Niall, Emerton and Sifris JJA).}

^{[5] Mackay v Dick (1881) 6 App Cas 251; Butt v M’Donald (1896) 7 QLJ 68.}

^{[6] Hera Project Pty Ltd v Bisognin [No 3] [2017] VSC 268 (Riordan J), citing, amongst others, Foran v Wight (1989) 168 CLR 385, 458 (Gaudron J).}

^{[7] Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701.}

^{[8] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266.}

^{[9] Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201}

^{[10] Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69, 157 (Niall, Emerton and Sifris JJA).}

^{[11] The Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17, 37; [1985] HCA 14 (Mason J); Shevill v Builders Licensing Board (1982) 149 CLR 620, 625–6; [1982] HCA 47 (Gibbs CJ).}

^{[12] Howard v Pickford Tool Co Ltd [1951] 1 KB 417 (CA), 421.}