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International Restructuring Newswire
Welcome to the Q2 2025 edition of the Norton Rose Fulbright International Restructuring Newswire.
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Australia | Publication | May 2019
In the recent decision of Bundanoon Sandstone Pty Ltd v Cenric Group Pty Ltd1 (Bundanoon) the New South Wales Court of Appeal held that a notice to show cause issued by a principal in the context of a termination regime in a construction contract was invalid on good faith grounds, with the consequence that the principal’s subsequent termination of the contract constituted a wrongful repudiation.
Ever since the decision of Priestley JA in Renard Constructions (ME) Pty Ltd v Minister for Public Work2 there has been ongoing controversy in the Australian courts as to the existence and content of a duty of good faith in the exercise of contractual powers and discretions, including in respect of the exercise of termination rights such as termination for convenience.
In Sino Iron Pty Ltd v Mineralogy Pty Ltd (No 2)3 Edelman J whilst sitting as a member of the Western Australia Supreme Court said:
The question of implication of a term of good faith into commercial contracts remains a vexed question.
In Commonwealth Bank of Australia v Barker4 the High Court had an opportunity to clear the air but declined to do so.
In the absence of any binding High Court authority, the New South Wales Court of Appeal has taken its own path and consistently stated that a duty of good faith in the performance and enforcement of commercial contracts is to be implied as a matter of law. This would encompass construction contracts. In Cordon Investments Pty Ltd v Lesdor Property Pty Ltd5 (also a construction contract dispute) Bathurst CJ said:
Lesdor did not dispute that it was appropriate to imply into the Agreement an obligation that the parties would act in good faith towards each other. This is consistent with the approach adopted in a number of decisions of this Court: …
In Bundanoon the New South Wales Court of Appeal continued along this path in dealing with the validity of the relevant show cause notice.
In short compass the facts were as follows.
On 20 June 2017 TWT Property Group Pty Limited (TWT) and Cenric Group Pty Limited (Cenric) entered into a head contract for demolition, shoring and excavation works by Cenric at a site in Pyrmont. Those works included the excavation of yellow block sandstone. With the approval of TWT, Cenric subcontracted the Works to Bundanoon who agreed to pay royalties based on the sale price of the harvested sandstone. Under the head contract Cenric agreed to pay TWT 50% of the realised sale price of harvested sandstone. However, by a letter agreement dated 30 June 2017 it was agreed that Cenric would pay TWT 50% of royalties received from Bundanoon until Cenric had retained $3M for itself. Thereafter the whole of the royalties received from Bundanoon would be payable to TWT.
At a meeting of the representatives of TWT, Cenric and Bundanoon held on 19 February 2018 the parties orally agreed to a variation of the head contract which covered, the following:
Thereafter, the relationship deteriorated. In particular TWT was dissatisfied with Cenric’s rate of progress. On 9 March 2018 TWT served a notice to show cause under the default and termination provisions of the head contract. The substantial breach alleged was a failure to progress the works diligently and with due expedition. On 19 March 2018 TWT served a take out notice which was in substance a termination of the head contract. On 20 March 2018 Bundanoon terminated the subcontract.
On 23 March 2018 TWT retained Bundanoon to carry out the remaining work under the subcontract.
Cenric commenced proceedings against TWT for damages for the wrongful termination of the head contract and against Bundanoon for recovery of unpaid royalties.
The primary Judge, having determined that the oral variation was contractually enforacble, held that the show cause notice was invalid for three reasons:
The Court of Appeal upheld the decision of the primary Judge and the correctness of his reasons for judgment. In delivering the principal judgment of the Court, Gleeson JA noted that the determination as to the enforceability of the oral variation agreement was dispositive of the validity of the show cause notice. Strictly therefore the good faith issue did not arise. However, this does not dilute the significance of Gleeson JA’s conclusion as to the applicability of good faith to the decision to issue the show cause notice.
Gleeson JA in dealing with the applicable legal principles said:
It is well accepted that, where a contractual power is given to one party for a purpose but in terms wider than necessary for the protection of its legitimate interests, the exercise of the power may be constrained by implied obligations of reasonableness and good faith.
His Honour noted the comment by Bathurst CJ in Cordon that the necessity for the implication of a term as to good faith had not been universally accepted. Relevantly, the Court of Appeal of Victoria does not accept that a duty of good faith is to be implied into commercial contracts as a matter of law.6
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