Victorian Court of Appeal on the prevention principle: co-operation, not good faith

The “prevention principle”  – essentially, that party A cannot complain of party B’s failure to do something if the reason for B's failure was something that A did or failed to do  – is one of the staples of construction contracting and its law. On 24 March, the Victorian Court of Appeal handed down its unanimous judgment allowing an appeal in Bensons Property Group Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69. The case arose in the planning rather than construction stage of the project, but offers important insights into the juridical basis of the principle as it applies across construction contracts. Those insights, resting on the implied duty of co-operation, may signal a divergence in the Victorian conception of the principle from other jurisdictions.

In Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151, the NSW Court of Appeal considered that the principle could be applied on the basis of either its "underlying rationale" (that a party cannot rely upon its own wrongdoing) or an "implied duty of good faith". The focus in Bensons (which is consistent with the greater reluctance historically of Victorian courts to imply a duty of good faith) was on the existence of a contractual breach of an implied duty to co-operate giving rise to the operation of the principle. The Court emphasised that the prevention principle cannot be considered "divorced from the terms of the contract" and that it is "a breach of a contractual term that gives rise to the potential application of the principle." The principle is not, the Court of Appeal stated, "a free standing principle of law".

Background to the Bensons case

Bensons entered into arrangements to acquire a development site in Port Melbourne. It also entered into a development management agreement (DMA) with Key Infrastructure Australia Pty Ltd (KIA) pursuant to which KIA agreed to procure the issue of a planning permit for the site by 31 December 2016 (sunset date) and Bensons agreed to pay KIA a management fee on the condition the planning permit was issued prior to the sunset date.

As it transpired, significant complications delayed the planning application process and:

• on 18 May 2016, KIA lodged an application at VCAT seeking review of the council’s deemed refusal to grant the planning permit;
• that same day, Bensons advised KIA that it did not agree to and would not pay the costs of any VCAT proceeding, further stating that commencing such proceeding "would constitute a breach by KIA" of the DMA; and
• in the circumstances, KIA withdrew the application lodged on 18 May.

Ultimately, KIA made further applications to VCAT. They were heard on 22 December 2016 with the result VCAT made orders including that "a permit is granted and directed to be issued" for the site. The permit was issued by council on 6 February 2017. By that time, Bensons had terminated the DMA (on 9 January 2017) because the permit had not been provided by the sunset date.

KIA commenced the proceedings to recover the management fee and damages. The primary judge found in favour of KIA on the basis that "Bensons had prevented it from procuring the issue of the planning permit" and "owed KIA a duty to co-operate which it breached by sending the 18 May 2016 letter".

Among other grounds, Bensons contended that the primary judge:

• erroneously applied the “prevention principle” without deciding that the preventative act was a breach of the DMA; and
• erred in holding that “prevention principle” applied such that Bensons deprived KIA of a substantial chance of obtaining the permit before the sunset date by sending the 18 May 2016 letter.

Both of these grounds were upheld by the Court of Appeal and the appeal was allowed.

Prevention principle and the duty to co-operate

The Court of Appeal rejected KIA's submission that Bensons needed only to have engaged in preventative conduct, so that it was not necessary for Bensons to have breached a term of the DMA. Rather, it noted that if the prevention principle applied, "it could only do so by reference to the DMA and the contractual obligations it imposed on the parties." The Court of Appeal held that the primary judge erred in considering the prevention principle "separately and in advance" of the question of whether Bensons’ conduct amounted to a breach of contract.

The Court had no difficulty in accepting that a duty to co-operate arises as an implied term of contract, endorsing the conclusion in Adaz Nominees Pty Ltd v Castleway Pty Ltd [2020] VSCA 201: this implied term has been recognised in Australia since the decision of the High Court in Secured Income Real Estate (1979) 144 CLR 596, and its origins extend back to at least Mackay v Dick in 1881.

However, the Court of Appeal did not accept that the letter of 18 May 2016 constituted a breach of that implied term, noting "whether the permit was granted either by the council, or on review by VCAT, was a matter within the control of KIA". In the circumstances it concluded:

"Because the conduct of Bensons fell short of impeding or preventing KIA from satisfying the development management conditions, it did not constitute a breach of the implied term of co-operation and did not otherwise engage the principle of prevention."

What this means for the construction industry

The uncertainty that attends the juridical basis and operation of the prevention principle remains, meaning that key issues including the extent to which the effect of the principle can be modified or excluded remain a matter for debate and potentially divergent outcomes in Victoria, NSW and beyond. Noting the preoccupation in Bensons with breach of an implied duty of co-operation as a basis for enlivening the prevention principle, it is not clear whether Victorian courts will demonstrate the same preparedness as, at least, the NSW Court of Appeal, to apply the principle on the basis of an implied a duty of good faith. The issue of good faith was given short shrift in Bensons, the Court noting "it was not open to imply a duty of good faith into the contract… because KIA failed to establish that an obligation of good faith was necessary in the sense explained in BP Refinery."