Prevention is better than the cure: the Victorian Court of Appeal affirms that the prevention principle is founded on a duty to cooperate

06 July 2022

Executive summary

The Victorian Court of Appeal recently delivered its judgment in Bensons Property Group Pty Ltd v Key Infrastructure Aus Pty Ltd [2021] VSCA 69 (Bensons).

Bensons is a reminder to parties who turn to the legal system to resolve issues and enforce their rights in circumstances where the relationship has soured. Parties should be aware that the court will not be concerned with all the peripheral grievances that surround the relationship. The court will only have regard to the application of the law to the contract or arrangement when determining a party’s entitlements.

Although the dispute arose during the planning phase as opposed to during construction, Bensons relevantly affirms three key matters for parties to a construction contract:

  1. Party X cannot assert the strict performance of a contractual obligation that Party X has prevented Party Y from performing;
  2. The implied duty to cooperate does not impose a duty to act generally in the other party’s best interest, and nor can it be used to impose an obligation that would be commercially advantageous where the contract does not provide for that obligation; and
  3. The prevention principle cannot be applied as though it is a separate legal principle that, when breached, carries enforceable remedies independent of the contract.

HWL Ebsworth Lawyers has expertise in construction contract disputes. Please contact Paul Graham of our Construction and Infrastructure team to discuss any aspect of the above.

Defining the prevention principle and the implied duty to cooperate

The ‘prevention principle’ is one that is founded in contract law and which put simply, means that Party X cannot complain of Party Y’s failure to do something under a contract if the reason for Party Y’s failure was caused by something that Party X did or failed to do.

There is also a clear line of authority in Australia that recognises that every contract imposes on the involved parties an implied general duty to cooperate ‘to enable the other party to have the benefit of the contract’.

What happened?

Key Infrastructure Australia Pty Ltd (KIA) provided services whereby it identified property development opportunities, obtained relevant permits, had plans drawn up and identified property developers to purchase properties with those plans and permits.

Bensons Property Group Pty Ltd (Bensons) was a property developer experienced in large scale developments, and became involved in the project with KIA as a funding partner to acquire land and associated businesses directly from the third party owner.

KIA and Bensons entered into arrangements for Bensons to acquire a site in Port Melbourne, Victoria (the Site).

KIA and Bensons entered into a Development Management Agreement (Agreement) whereby:

  1. KIA was to obtain the requisite planning permit by the sunset date of 31 December 2016, and the consent of a third party with a covenant over the Site; and
  2. in exchange, Bensons would pay KIA a $2 million management fee, by way of instalments throughout the life of the project.

The Agreement provided, among other things, that payment of the management fee was conditional on KIA obtaining the planning permit by the sunset date.

The Council mistakenly determined not to issue the planning permit for the Site. KIA therefore appealed the Council’s failure to issue the planning permit to the Victorian Civil and Administrative Tribunal (VCAT), but withdrew the application after Bensons issued a letter to KIA stating that it: (a) would not fund the litigation; and (b) a planning permit that was issued by VCAT (as opposed to council) would constitute a breach of the Agreement (Bensons Letter).

KIA later resubmitted its application to VCAT, and on 22 December 2016 VCAT ordered Council to grant the permit.

Council issued the planning permit on 6 February 2017 – several weeks after the expiry of the sunset date.

Bensons terminated the sale contract and the Agreement and left the project because KIA had failed to obtain a planning permit by the sunset date. KIA proceeded with the development and eventually sold the land with the planning permit to a third party.

KIA sought payment of the balance of the management fee from Bensons, which Bensons refused to pay.

KIA commenced proceedings against Bensons to recover the balance of the management fee, and Bensons counterclaimed against KIA for recovery of the instalments of the management fee that had already been paid to KIA.

The trial judge found that, although the permit had not been issued in time, by issuing the Bensons Letter. Bensons had prevented KIA from meeting the sunset date and breached an implied duty to cooperate.

The Court of Appeal decision

Bensons appealed the trial decision on the following grounds:

  1. the trial judge had erroneously applied the prevention principle without considering whether the act of prevention was a breach of the Agreement; and
  2. the trial judge had erred in holding that Bensons breached the implied term to cooperate in the Agreement.

The appeal was allowed and KIA was ordered to refund the instalments of the management fee already paid to it.

The Court of Appeal held first that the prevention principle could only be applied by reference to the contractual obligations of the parties under the Agreement, ie the prevention principle could not be applied as an independent legal principle that carries enforceable remedies outside of a contract.

It therefore followed that the trial judge had erred in applying the prevention principle without the foremost consideration of whether Bensons’ conduct had amounted to a breach of contract.

Second, the Court of Appeal found that Bensons had not breached the implied duty to cooperate, because, upon proper construction of the Agreement, Bensons was contractually obliged to actively participate in the process to obtain a planning permit. To gauge whether Bensons had acted wrongfully, those acts had to be measured against its contractual obligations.

Albeit the Bensons Letter was based on an erroneous construction of the Agreement, that erroneous construction did not prevent KIA from obtaining the planning permit. Therefore, Bensons had not interfered with KIA’s performance under the Agreement.

Key Takeaways

The parties to a contract usually rely on an effective and amicable working relationship to deliver a successful project. However, working relationships often fail and projects become difficult (if not impossible) to successfully deliver – and the parties turn to dispute resolution or litigation to assist them to resolve disputes and realise interests in a project.

When parties turn to the legal system to enforce and uphold their rights, they need to be aware that the courts will only be concerned with the proper application of the law in the circumstances that are relevant to the case.

It is important for parties to note 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.

The full decision can be found here.

This article was written by Paul Graham, Partner, and Mia Crema, Solicitor.

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