Blog

23Feb, 16

Background Australia has been in our opinion relatively slow in following United Kingdom’s developments and enforcement of good faith bargaining. A recent decision in the Victorian Supreme Court North East Solution Pty Ltd –v- Masters Home Improvement Australia Pty Ltd and Woolworths Limited (2016) VSC 1 put fair and square the obligations of parties in terms of good faith and reasonable standards of conduct. Woolworths (WOW) had embarked upon a very aggressive campaign in 2009 to compete against Bunnings Hardware outlets by planning to roll out in a relatively short timeframe a large number of outlets which were considered to be a higher standard in finish to the Bunnings product and which in particular, would be attractive to women. WOW had identified a Bendigo site in Strathdale which was centrally located and entered into negotiations with the Northeast (NE) which were formalised by a letter of offer (LO) dated 2 June 2009 and an agreement to lease (ATL) executed on 24 February 2010. The proposal contained in the LO was that NE would construct a Masters Home Improvement store on a turnkey basis to a specification provided by WOW (10,533m2) and proposed that should the design brief differ in  cost to other major trade supply/restricted retail premises, the difference  in cost was to be made (by the tenant) by payment of  a lump sum with a quantity surveyor to verify the cost difference. Once completed, a lease would commence for a period of 12 years with 5 options of 6 years each with a commencing rental of $1,264,200 per annum. It was a term of the LO that the proposal was subject to approval by the WOW Board, NE gaining control of all the Site land and finalisation of development plans, and scope of works to WOW’s satisfaction. It was specified that the LO was to be a binding agreement,  subject to execution of an ATL based on the WOW standard documentation,  including the terms contained in the LO. Issue During the intervening period and before any negotiation or disagreement between the parties arose as to the calculation of the landlords work costs, NES contended that WOW had decided take into consideration other extraneous objects such as:

  • to pursue as an alternative and existing long established hardware store being Hume & Iser;
  • harbouring concerns regarding the price escalation above original budget & development cost($3.7m –v- $1.7m);
  • NES’ ability to complete; and
  • potential Council planning opposition;

which resulted in WOW terminating the ATL in May 2010. An essential term of the subsequent ATL, given the haste which WOW wanted the construction completed , was that NES would plan to construct a store  to a Bunnings specification  and WOW would agree to pay the difference between this Bunnings specification and the WOW Briefing Kit . In particular clause 2.2 of the ATL provided that: As soon as reasonably practicable after receipt by the landlord of the (Woolworth’s) Briefing Kit the landlord acting reasonably and in good faith would engage in a process with the tenant whereby the landlord’s works and costs could be examined on an open book basis and after engaging in a range of review processes, the landlord and tenant acting reasonably and  in good faith, would endeavour to resolve any differences in an  attempt to determine the amount the tenant must contribute towards the landlord’s work costs (if any) within a timeframe of either 20 April 2010 or a date which is six weeks after the receipt by the tenant of the notice of the landlord’s work costs. Decision Justice Croft who is in the writer’s opinion, is a long established and acknowledged leader in the profession in leasing matters,  determined that the clause was not an agreement ‘merely to negotiate’  but that it was an agreement to act reasonably in good faith to resolve differences between the NES estimate of the landlord’s work costs and WOW’s position. It was determined that WOW (on a reasonable person basis) could have determined that WOW, if it had complied with the object of identifying and resolving the differences in the calculation of the landlord’s work costs (writer emphasis) could have done so much more than it did and wrongfully terminated the agreement in May 2010. His Honour made an award in damages to NES of $10.875 m plus costs. Justice Croft in spelling out good faith and reasonableness principles, referred amongst other things to 3 salient principles based upon a lecture provided by the former High Court judge Sir Anthony Mason at Cambridge in 2000:

  1. the obligation of the parties to cooperate in achieving contractual objects (loyalty to the promise itself);
  2. compliance with honest standards of conduct; and
  3. compliance with honest standards of conduct that are reasonable having regard to the interests of the parties.

Take away point As a result of the above decision, we recommend readers carefully consider the fine line between robust and hard negotiation bargaining and breaching good faith principles and reasonableness, particularly if they are specifically stipulated in any agreement.