The Prevention Principle and Supporting Duty of Cooperation

A recent decision of the Victorian Supreme Court of Appeal (VSCA) in Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69 considered whether a contractual breach of an implied duty to co-operate can enliven the prevention principle. While the VSCA was willing to imply a duty to co-operate, in overturning the decision of the Victorian Supreme Court (VSC), it held that the conduct in question did not constitute a breach, or prevent the other party from performing its obligations.

KIA entered into a design management agreement (the Agreement) with Bensons, to acquire a site in South Melbourne. The Agreement required KIA to obtain a planning permit for the proposed development in return for a $2 million fee. Whilst Bensons was required to pay KIA in four instalment payments, the outstanding balance of the fee owing to KIA and retention of instalments already paid, was dependent on the City of Port Phillip (the Council) issuing a permit before a sunset date.

When it became apparent that the Council might delay or refuse to issue the required permit, KIA filed an application with VCAT seeking orders directing the Council to issue the permit. In response, Bensons issued a letter to KIA (the Letter), stating that:

•    it did not agree to KIA commencing proceedings;
•    it would not fund the proceedings; and
•    if KIA commenced proceedings, it would constitute a breach of the Agreement.

On receiving the Letter KIA immediately withdrew its application. However, on advice of its legal representatives KIA reinstated the VCAT proceedings. Prior to the sunset date, VCAT directed the Council to issue the permit, however, the Council did not issue the permit until after the sunset date. Bensons terminated the Agreement following KIA’s failure to procure the permit within the required timeframe.

KIA commenced proceedings against Bensons in the VSC arguing it had fulfilled its obligations under the Agreement and seeking damages. KIA submitted, among other things, that Bensons’ conduct had caused it to withdraw the VCAT application which:

•    constituted a breach of Bensons’ implied duty to co-operate; and
•    prevented KIA from procuring the permit by the sunset date, in circumstances where Bensons no longer wished to proceed with the development, or pay KIA any fees.

The primary judge accepted that KIA did not procure the permit by the sunset date, but determined that Bensons’ conduct prevented it from doing so within the prescribed timeframe. As to the operation of the prevention principle, the primary judge held:

•    the relevant question was whether Bensons’ conduct deprived KIA of a “substantial chance” of meeting the condition;
•    the Letter caused KIA to withdraw its VCAT application, depriving it of a substantial chance of obtaining the permit by the sunset date; and
•    the Letter was part of a strategy to bring about KIA’s non-compliance and allow Bensons to exit the Agreement without itself being in breach.

The primary judge separately found that Bensons had an implied duty to co-operate. This duty required Bensons to refrain from taking positive steps which would prevent KIA from performing its obligations. The Letter breached this duty.

Bensons appealed the decision in the VSCA, arguing among other things that:

•    the prevention principle could only be applied where there was a breach of contract; and
•    the Letter did not breach the implied term to co-operate, or deprive KIA of a substantial chance of obtaining the permit.

Bensons’ appeal was successful and the VSCA ordered the refund of any instalment payments made to KIA. In reaching its decision, the Court stated:

•    the primary judge had erred in applying the prevention principle without first considering whether the conduct constituted a breach, observing that “the assessment of the conduct must be rooted in the contract”;
•    the duty to co-operate, both as a positive obligation and negative covenant, arises as an implied term because of necessity, and must give way to the express terms of the contract;
•    to gauge whether Bensons’ acts were wrongful, they must be measured against the contractual obligations; and
•    the Letter did not breach the duty to co-operate, as it was KIA’s obligation to obtain the permit. Bensons’ conduct did not hinder or prevent KIA from fulfilling this obligation, and there was no affirmative obligation imposed on Bensons to assist or participate in that process.

The full decision can be found here.