Insights

In brief - Courts may look to surrounding circumstances to assist in interpreting contracts

The decision of North East Solutions Pty Limited v Masters Home Improvements Australia Pty Limited [2016] VSC 1 shows that courts will consider surrounding circumstances to try to give effect to the terms of a commercial transaction, that courts are prepared to hold that there are two distinct obligations when a party is required to act "reasonably and in good faith", and that the courts will bypass mere technicalities where a party is seeking to avoid contractual obligations, particularly where the other party has acted significantly to its detriment.

Masters terminates lease agreement for proposed Bendigo outlet

This matter involved the Woolworths' Masters Homeware expansion program where the plaintiff negotiated an agreement for lease with the defendant in relation to a proposed Masters outlet for Bendigo.

It was acknowledged that, due to Woolworths' significant expansionary plans for its Masters outlets, the transaction moved significantly more quickly than would be the norm and some aspects that normally would have been negotiated in great detail, particularly with regards to costing of works and liability for various works, did not receive the attention they normally would.

Woolworths decided to enter into a binding agreement because of the criticality of the location and to ensure that the major competitor for Masters, Bunnings Hardware, did not secure this site. This was notwithstanding the fact that the normal "briefing kit", which would have dealt with works with particularity and who was responsible for them, was not available.

Ultimately, for a number of commercial reasons, Masters terminated the agreement for lease and was sued by the plaintiff for breach of the agreement and damages.

Courts will apply a number of principles to assist with cases of contractual interpretation

The Court held that the following principles are to be applied in the case of contractual interpretation:
  • To give meaning to a contractual term, the contract must be construed by the Court as a whole, and having regard to the purpose of the transaction and the objects to be secured.
  • Where a term of a commercial contract is ambiguous, evidence of surrounding circumstances is admissible to assist in the interpretation of the provision.
  • Where the language of a contract is open to more than one interpretation, the Court should prefer a construction that does not lead to unreasonable results.
  • The Court must look to enforce agreements that have been freely entered into by the parties and will give effect to the objective intention of the parties rather than avoid the agreement altogether.

Letter of offer, agreement for lease and obligations considered by Court

In this case, the Court had regard to the original leasing letter of offer which was stated to be binding, as well as the terms of the agreement for lease. The Court also had regard to the content of the leasing letter of offer, notwithstanding the fact that the agreement for lease contained the usual provisions stating that the terms of that document comprised the entire agreement between the parties.

The Court further looked at the obligations stated in the document that the parties had to act reasonably and in good faith.

Whilst acknowledging that there was considerable overlap between these two concepts, it was held that they are separate obligations imposing a high standard on the parties to co-operate in achieving the contractual obligations, to act with honest standards of conduct, and to comply with standards of conduct which are reasonable having regard to the interests of the parties.

Woolworths found in breach of obligations and agreement, liable for damages

The Court held that Woolworths had not complied with its contractual obligations, in particular the obligations to act reasonably and in good faith with regards to the dispute as to costings of work and who may be liable for carrying out the works. It had failed to communicate with the plaintiff as to the matters where there was a difference between the parties, and it refused to provide detailed or transparent information with regards to its alleged concerns with the costings of the work.

Ultimately, the Court held that the property management of Woolworths had decided for strategic reasons not to proceed with the agreement for lease of the site and to pursue the acquisition of an alternative site, that Woolworths had breached its obligations of acting in good faith in the way it dealt with the alleged costs of works dispute (and in fact found that it had acted in bad faith), that Woolworths had breached the agreement and that it was liable for significant damages (with the award being for $10.875 million plus interest).

Parties to a contract must take obligations seriously

Firstly, parties must take their obligations to act reasonably and in good faith seriously.

Secondly, this case is yet another example where the courts are willing to look to extraneous information and documentation to give business efficacy to a transaction, and also to uncover the real intentions and drivers of the conduct of parties.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​