Good faith - be careful what you’re bargaining for

June 2, 2017

The Victorian Court of Appeal recently handed down judgment in relation to an appeal from the Supreme Court decision in North East Solution Pty Ltd v Masters Home Improvement Pty Ltd [2016] VSC 1 (Masters).

 

Masters concerned an agreement between North East Solutions and Woolworths for the development and lease of a Masters home improvement store in Bendigo. The agreement contained a clause which provided that the parties could only terminate the agreement if the parties, ‘acting reasonably and in good faith’, were unable to resolve any disagreement that arose. The trial judge determined that the clause was sufficiently certain to be enforceable, despite the fact that the contract did not elaborate on what was meant by the words "in good faith". The judge also held that Woolworths had failed to act reasonably or in good faith, resulting in an award of damages to North East Solutions of over $10 million.

 

The decision was appealed to the Court of Appeal. The Court of Appeal overturned the finding, and held that Woolworths had not failed to act reasonably or in good faith, and therefore there was no breach of the agreement. The Court of Appeal decision did not focus on the the extent or enforceability of an obligation to negotiate in good faith when making its finding, but rather the Court of Appeal reached its position primarily having regard to, and ultimately overturning, several key factual findings that had been made by the trial judge.

 

The decision is nonetheless a helpful reminder to ensure that care is taken when drafting clauses imposing an obligation to act reasonably and in good faith, as the spectre of uncertainty as to what such an obligation entails, and therefore whether a breach has occurred, still looms large.

 

The full decision can be found here.

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