The Victorian Court of Appeal has delivered an important judgment on the relationship between the prevention principle (that a party may not benefit by relying on its own breach of the contract) and the implied duty for parties to a contract to cooperate.

Background

Key Infrastructure Australia Pty Ltd (KIA) and Bensons Property Group Pty Ltd (Bensons) entered into a development management agreement (DMA) for a site in Port Melbourne. Under the DMA, KIA agreed to procure the planning permit for the site by the sunset date of 31 December 2016 for a development management fee of $2,000,000. If the planning permit was not issued prior to the sunset date, no development management fee was payable to KIA and any instalments paid were to be refunded.

As the council had not issued the planning permit, on 16 May 2016, KIA filed an application to the Victorian Civil and Administrative Tribunal (VCAT). Later that day, Bensons sent a letter to KIA stating that any application to VCAT would be a breach of the DMA. As a result, KIA withdrew its application to VCAT.

KIA re-issued its application to VCAT on 5 July 2016. On 22 December 2016, VCAT directed the council to issue the planning permit, which was issued by the council on 6 February 2017. KIA sought payment of the balance of the development management fee on the grounds that a permit was not issued by the sunset date.

KIA commenced proceedings against Bensons seeking to recover the balance of the development management fee. Bensons counterclaimed for recovery of the instalments that had been paid to KIA.

Trial Decision

At trial, the court held that Bensons had prevented KIA from securing the issue of the permit by the sunset date and was therefore prevented from relying on that time limit. Alternatively, the court held that Bensons had breached the implied term to cooperate in the DMA. However, the judge determined that KIA had fully mitigated its loss and awarded nominal damages.

Court of Appeal Decision

Bensons appealed the decision of the trial court on grounds that included that the trial judge:

• erroneously applied the prevention principled without considering whether the act of prevention was a breach of the DMA; and
• erred in holding that Bensons breached the implied term to cooperate in the DMA.

The appeal was allowed and KIA was ordered to refund the instalments of the development management fee which had been paid to it.

What is the foundation of the prevention principle?

The court held that the prevention principle can only be applied by reference to the contractual obligations under the DMA. The prevention principle cannot be applied as a separate legal principle that carries with it enforceable remedies outside of the contract. It followed that it was an error for the trial judge to apply the prevention principle without first considering whether Bensons' conduct amounted to a breach of contract.

Was there a breach of the implied duty to cooperate?

The court held that Bensons did not breach the implied duty to cooperate. Bensons was not required to play an active role in the permit application process. While the letter sent by Bensons on 16 May 2016 was based on an erroneous construction of the DMA, that erroneous construction did not prevent KIA from obtaining the permit. As such, Bensons did not interfere with KIA's performance under the DMA.

For more information or advice on this matter, please reach out to a member of our Projects, Infrastructure and Construction team.