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Masters Home Improvement Pty Ltd v North East Solution Pty Ltd:
Reinforcing the Chasm in Commercial Contract Law
The recently decided case of Masters Home Improvement v North East Solution1 has reinforced
the chasm between the Victorian and New South Wales Courts of Appeal in relation to
cu
ently unsettled areas of commercial contract law. This chasm is evident in their respective
approaches to both the construction of commercial contracts and the implied duty of good faith
in such contracts.
Following an overview of the facts and decision in Masters, it will be argued that at the core
of the divide in approaches to contractual construction are differing interpretations of High
Court authority. Proceeding this, the failure of the court in Masters to consider the implied duty
of good faith will be
iefly surveyed and utilised to support the contention of an important
divide between these intermediate appellate courts. Moreover, it will be maintained that this
chasm is attributable to the lack of clear High Court authority and guidance in these areas.
Facts
In June 2009, Woolworths entered into a binding agreement with Maxi Foods Group (‘Maxi’).
Under this agreement, the ‘Letter of Offer’ (‘LOO’), Maxi agreed to purchase a site and to
construct a Masters store on it to be leased to the Woolworths Group. Clause 13 of the LOO,
inter alia, stated that Woolworths would pay Maxi the difference in the cost of construction
etween a Masters and Bunnings store by payment as a lump sum.
In Fe
uary 2010, North East Solution (‘NES’), a corporate entity of Maxi, entered into an
Agreement for Lease (‘AFL’) with Masters and its parent company Woolworths for the site.
Under clause 2.2(b), NES and Masters, ‘acting reasonably and in good faith’, were to ‘attempt
to resolve any difference they may have in relation to’: (i) NES’ determination of the cost of
construction (‘LWC’); and (ii) the amount Masters was to contribute to the LWC (the ‘tenant’s
contribution’) and the manner in which the contribution was to be made.
1 Masters Home Improvement Pty Ltd v North East Solution Pty Ltd [2017] VSCA XXXXXXXXXXApril 2017) (‘Masters’).
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After the parties failed to agree on the LWC, tenant’s contribution and whether payment was
to be by lump sum or instalments, Woolworths purported to exercise its right under clause
2.2(c) and terminated the AFL.
Decision
Contractual construction
In relation to contractual construction, the primary issue on appeal was whether the AFL
equired Woolworths to pay the tenant’s contribution by way of lump sum.2 If it did, given the
obligations that the contractual duty to act reasonably and in good faith was held to encompass,
Woolworths’ insistence on paying by instalments would amount to a
each of this duty.3
In reaching the conclusion that the AFL did not impose this requirement, the court refe
ed
firstly to statements in the recent High Court decisions of Woodside4 and Wright Prospecting5
as to the co
ect approach to the construction of commercial contracts.6 Applying this objective
approach, said to require consideration of the contract’s ‘commercial purpose’, the court
easoned that it was implausible that commercial parties in the circumstances would have
intended the word ‘manner’ in clause 2.2(b)(ii) to simply mean the mechanics of payment
ather than whether payment was to made by lump sum or instalments.7
Having cited Mason J’s ‘true rule’ in Codelfa,8 the court proceeded to reason that, as there was
no ambiguity in clause 2.2(b)(ii) in relation to the meaning of ‘manner’, no recourse to
su
ounding circumstances – including the LOO – could be had to construe the AFL.9
Lastly, relying on well-settled principles, the court held that clause 2.2 did not incorporate from
clause 13 of the LOO the obligation to pay by lump sum by incorporation, inference and/or
implication.10 Rather, the court found that a proper construction of clause 2.2 was that the
2 Ibid [49].
3 Ibid [99], [300]–[303].
4 Electricity Generation Corporation v Woodside Energy Ltd XXXXXXXXXXCLR 640.
5 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd XXXXXXXXXXCLR 104.
6 Masters [2017] VSCA XXXXXXXXXXApril 2017) [56]–[57], [79], [81]–[85].
7 Ibid [56], [78].
8 Codelfa Construction Pty Ltd v State Rail Authority (NSW XXXXXXXXXXCLR 337, 352.
9 Masters [2017] VSCA XXXXXXXXXXApril 2017) [57], [80]–[81].
10 Ibid [58]–[62], [82]–[85].
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‘manner’ of payment was to be determined by the ‘reasonable and good faith negotiation
process’ provided by clause 2.2(b).11
Breach of obligation of good faith
The content and enforceability of the express contractual duty to act reasonably and in good
faith were not in issue in the appeal.12 The decision of the court in holding that Woolworths
and Masters had not
eached their contractual duty was reached primarily by reviewing, and
ultimately overturning, several key factual findings made at first instance.13
Analysis
Contractual construction and ambiguity: the co
ect approach?
The approach to contractual construction taken by the court in Masters presupposed, and in
turn reinforced, a na
ow interpretation of Mason J’s ‘true rule’ in Codelfa; namely, that there
is a precondition of ambiguity before recourse may be had to su
ounding circumstances to
construe contractual terms.14 Moreover, although not explicitly stated, the court clearly
favoured a reading of Woodside and Wright Prospecting as not requiring detraction from this
na
ow interpretation of Codelfa.15
While it purported to apply the objective approach to the construction of commercial contracts
affirmed in these recent decisions, the court in fact tailored its citation of authority to
accommodate its desired na
ow interpretation. Indeed, the court omitted the majority’s
comments in Woodside, contained in the same paragraph from which it cited, that the objective
approach requires consideration of the ‘su
ounding circumstances known to [the parties]’ in
addition to the ‘commercial purpose’ of the contract.16 Consequently, the court approached the
construction of the AFL by first asking itself whether the term at issue was ambiguous.17
Failing to find any relevant ambiguity, it then ruled out recourse to the LOO as a su
ounding
11 Ibid [81]–[85].
12 Ibid [99].
13 Ibid [182], [196]–[197], [213], [218], [258]–[263], [299], [301]–[303], [336], [364].
14 Ibid [80]–[81]; Western Export Services Inc v Jireh International Pty Ltd XXXXXXXXXXALJR 1 [2]–[3] (Gummow,
Heydon and Bell JJ); Thomas Prince, ‘Defending Orthodoxy: Codelfa and Ambiguity’ XXXXXXXXXXAustralian Law
Journal 491, 491, 494.
15 Masters [2017] VSCA XXXXXXXXXXApril 2017) [56]–[57], [80]–[81]; Prince, above n 14, 491, 499.
16 Electricity Generation Corporation v Woodside Energy Ltd XXXXXXXXXXCLR 640, 656–7 [35] (French CJ,
Hayne, Crennan and Kiefel JJ). Cf Masters [2017] VSCA XXXXXXXXXXApril 2017) [56].
17 Masters [2017] VSCA XXXXXXXXXXApril 2017) [80]–[81].
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circumstance to assist in construing the term.18 In turn, the court has presented this as the
co
ect and authoritative approach to be followed, at least in Victoria.
This approach of the Victorian Court of Appeal in Masters, underpinned by an implicit na
ow
eading of Woodside, diverges markedly from the approach earlier taken by the New South
Wales Court of Appeal in Mainteck.19 In Mainteck, Leeming JA (with whom Ward and Emmett
JJA agreed) considered Woodside as affirming, in line with a
oader interpretation of Codelfa,
the use of evidence of su
ounding circumstances to construe a commercial contract, even
where the contractual language to be construed is not ambiguous.20
Although Mainteck has been subsequently supported, albeit not universally, it was notably not
cited by the court in Masters.21 Given that intermediate appellate courts are bound to follow
the decisions of other appellate courts, the court’s failure to consider Mainteck could only be
excused on one or both of two grounds.22 The first, namely that Leeming JA’s opinion that
Woodside affirmed there to be no precondition of ambiguity was strictly obiter, is arguable
given that ambiguity in the contractual language at issue in Mainteck was identified.23 The
second, namely that the court considered the decision to be ‘plainly wrong’, can only be
infe
ed.24 It follows that there is an evident and important divide between the respective views
of these intermediate appellate courts as to the co
ect, or permissible, approach to the
construction of commercial contracts.
Subsequent to its decision in Woodside, and undoubtedly aware of Leeming JA’s interpretation
of it in Mainteck, the High Court in Wright Prospecting did little to remedy this situation.25
The court did confirm that comments made in Jireh26 supporting the proposition that there is a
18 Ibid.
19 Mainteck Services Pty Ltd v Stein Heurtey SA XXXXXXXXXXNSWLR 633.
20 Ibid 653 [71], 654–5 [78]–[79]; Prince, above n 14, 491–2.
21 See, eg, Newey v Westpac Banking Corporation [2014] NSWCA XXXXXXXXXXSeptember 2014) [89]; Stratton
Finance Pty Ltd v We
XXXXXXXXXXALR 166 [40]. Cf Apple and Pear Australia Ltd v Pink Lady America LLC
[2016] VSCA XXXXXXXXXXNovember 2016) [136] (Tate JA).
22 Farah Constructions Pty Ltd v Say-Dee Ltd XXXXXXXXXXCLR 89, 151–2 [135]; Brent Michael and Derek Wong,
‘Recourse to Contractual Context Reaffirmed’ XXXXXXXXXXAustralian Law Journal 181, 183, 186, 189.
23 Mainteck Services Pty Ltd v Stein