In the recent case of Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201, the Victorian Court of Appeal held that where appropriate, parties to an agreement have a positive obligation to act and co-operate and do all such things as are necessary to enable the other party to receive the benefit of the agreement.
Background
In 2010, Castleway entered into a service agreement with the TPC Group (TPC) for the purpose of providing property development services to TPC. Pursuant to the agreement, Castleway was entitled to receive payment of a service fee, that being a scaled percentage of the TPC Group’s annual profit (TPC Group Profit).
Prior to the termination of the agreement, TPC made a charitable donation in the amount of $20 million which resulted in a reduction in the TPC Group Profit for that financial year (that being $40 million down to $20 million) and therefore significantly reduced the service fee amount that Castleway was entitled to receive.
A dispute arose in relation to determining the true meaning of ‘TPC Group Profit’ as defined in the agreement.
Castelway argued it was entitled to receive its service fee on a definition of ‘Group Profit’ that excluded the $20 million donation having been made, whereas TPC argued that the donation was properly excluded from that calculation.
The Court of Appeal’s decision
On appeal, TPC submitted, amongst other issues, that the trial judge had erred in finding that a term should be implied to give business efficacy to the agreement. TPC stated that the agreement used clear language and did not permit the implication of a term which would preclude expenses not incurred in connection with the TPC Group’s normal business activities from operating to reduce the service fee.
The primary judge at trial initially held that, by implication of fact, that the service fee could only be reduced by expenses incurred in the ordinary course of TPC’s business. However, the Court of Appeal held that the express terms in the agreement provided that all tax deductible expenses must be taken into account, therefore this implied term would contradict those express terms.
The Court of Appeal held that the $20 million donation was not deemed to be a part of the TPC Group Profit, however the Court of Appeal did consider whether Castleway was entitled to receive a greater service fee. The relevant duty referred to by the Court of Appeal is the ‘duty to afford the other party the benefit of what he has contracted for; not a duty to act generally in the other party’s best interests.’
Terms implied by law
The Court of Appeal stated that under terms implied by law, Castleway and TPC were both obliged to do all things as were necessary to enable the other party to have the benefit of the agreement, and not to hinder or prevent the fulfilment of the purpose of the express promises made in the agreement.
The Court of Appeal held that: ‘the $20 million donation made by TPC was an action which had the effect of substantially reducing the TPC Group Profit and therefore prevented Castleway from receiving the benefit of the agreement and hindering or preventing the fulfilment of the purpose of the express promises in the agreement, by depriving Castleway of a substantial part of its remuneration’.
It is important to note that the law will imply, in appropriate circumstances, a positive obligation to co-operate and do all things required to enable the other party to have the benefit of the agreement and will operate so as to not hinder or prevent the fulfilment of the purpose of the express promises made in the agreement.
To read the judgement in full, click here.
Lessons learned
Prior to taking any positive steps to repudiate or terminate any commercial agreement on the basis that your counterparty to the agreement has taken steps or is omitting to take any action that you believe is depriving you of the benefits you are entitled to receive under that agreement, advice should be sought, as your actions may be incapable of utilising this implied duty as determined by the Court of Appeal in this case.
More information
For further information, or to discuss the issues raised in this case note, please contact Jeremy Goldman, Principal Lawyer and Head of Commercial and Corporate, on (03) 8600 8886, Darren Brown, Principal Lawyer, on (03) 8600 8867, or Roger Rothfield, Special Counsel, on (03) 8600 8844.
Note: This update is a guide only and is not intended to constitute legal advice.