Will a failure to act in good faith invalidate a show cause notice?

May 31, 2019

We previously provided an update (which can be found here) on the NSW Supreme Court decision of Cenric Group v TWT Property Group [2018] NSWSC 1570.  That update focussed on the court’s finding that a “no oral modification” clause was ineffective in excluding the enforceability of a subsequent oral agreement to vary the terms of a commercial contract.

 

The present update focuses on TWT Property Group’s appeal to the NSW Court of Appeal (NSWCA).  Whilst TWT did not directly challenge the primary judge’s finding regarding the no oral modification clause, it advanced a number of other grounds of appeal, including in relation to the primary judge’s findings on the validity of a show cause notice.

 

TWT, the developer, issued Cenric, the head contractor, a show cause notice based on alleged substantial contractual breaches by Cenric, being a substantial departure from the construction programme, and a failure to proceed with the works with due expedition and without delay.  The notice required Cenric to show cause in writing as to why TWT should not exercise its right to take the contract works out of Cenric’s hands.  Cenric responded, disputing the basis of TWT’s notice, following which TWT terminated the contract.

 

The court at first instance found that the show cause notice was invalid and that TWT’s attitude in issuing the notice was redolent of bad faith.  TWT challenged this finding on the basis that (amongst other things):

 

  • TWT was entitled, in circumstances where there was no remaining remedy for breach of Cenric’s obligation to pursue the work under contract diligently, to protect its own commercial interest and that it was not in bad faith to do so; and

  • the show cause explanation provided by Cenric was inadequate.

 

In dismissing TWT’s appeal, the NSWCA held:

  • it was well accepted that, where a party possesses contractual power for a particular purpose, and the power is expressed in terms wider than necessary for the protection of its legitimate interests, the exercise of that power may be constrained by the implied obligations of reasonableness and good faith;

  • the obligation of good faith could be “best regarded as an obligation to eschew bad faith”;

  • at the time TWT issued the show cause notice, it had already decided to take the works out of Cenric’s hands, such that it was not prepared to accept any cause that Cenric might have shown; and

  • the trial judge did not err in finding that TWT had closed its mind on the subject prior to issuing the notice, and that the notice had been made in bad faith.

 

The full decision of TWT Property Group Pty Limited v Cenric Group Pty Limited [2019] NSWCA 87 can be found here.

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