Good faith and reasonableness does not require subordination of legitimate interests
April 23, 2019
In the recent decision of the Supreme Court of Victoria in Primary Flooring Pty Ltd v Australian Comfort Group Pty Ltd  VSC 104 the Court reaffirmed that, when considering the operation of an implied obligation of good faith and reasonableness in a contractual context, such obligation should not be inconsistent with an express term of the contract, and importantly, should not require a party to subordinate its own legitimate commercial interests to those of the other party.
Primary Flooring sought to terminate its supply agreement with Comfort Group for the supply of scrap foam for use in the production of carpet underlay (the Supply Agreement).
The Supply Agreement stated that the grounds for termination of the agreement were limited to:
- mutual consent in writing;
- as a result of non-performance; or
- as a result of insolvency.
Primary Flooring sought the consent of Comfort Group to terminate the Supply Agreement, which Comfort Group declined to give. Primary Flooring commenced proceedings, seeking, among other things, a declaration from the Court that in refusing to consent to the proposed termination Comfort Group had unreasonably withheld its consent and/or was not acting in good faith.
In finding for Comfort Group, Croft J held:
- the requirements for the implication of terms set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 had not been satisfied;
- in particular, an implied term of good faith and reasonableness was not required to give business efficacy to the Supply Agreement; and
- in the circumstances, an implied obligation of good faith and reasonableness would contradict the express provisions relating to termination, which provided that termination could only be effected by the consent of both parties in writing, or as a result of non-performance or insolvency.
Croft J stated that even if such a term were implied, Comfort Group had not acted unreasonably. Rather, the Court concluded that Comfort Group’s response to the request for consent from Primary Flooring was entirely reasonable, particularly in circumstances where it would suffer a significant commercial loss if the Supply Agreement was terminated. As such, the Court found that Comfort Group should not be required to subordinate its legitimate interests to those of Primary Flooring.
The full decision can be found here.