In Gold Group Properties Ltd v BDW Trading Ltd [2010] EWHC 323 (TCC); [2010] BLR 235; [2010] PLSCS 189, the High Court refused to accept that the financial crisis was an unexpected supervening event that frustrated a development agreement. The decision paved the way for further proceedings between the parties to establish whether either or both were in breach of their contract.
In order to reach a decision, the judge had to consider, among other things, the extent of the parties’ duty to act in good faith towards each other. Did the existence of such a duty require the seller to agree to adjust the revenue-sharing mechanism laid down in the development agreement or, at the least, to indicate a willingness to negotiate such an adjustment in favour of the developer?
The judge referred to Berkeley Community Villages Ltd v Pullen [2007] EWHC 1330 (Ch); [2007] 3 EGLR 101, where the court held that a duty to act in the utmost good faith required the parties to observe reasonable commercial standards of fair dealing and to be faithful to their agreed common purpose consistently with their justified expectations of each other.
The judge also considered Overlook Management BV v Foxtel Management Pty Ltd [2002] NSWSC 17, in which the Supreme Court of New South Wales ruled that a party that is subject to a duty to act in good faith need not subordinate its own interests to those of another contracting party, so long as in doing so, it does not unreasonably interfere with or seriously undermine the enjoyment of benefits conferred by express contractual terms, or render such benefits worthless.
The judge cited extensively from Overlook. The Supreme Court had ruled that a duty to act in good faith prevents parties from cynically relying on the letter of their agreement. Importantly, however, it does not impose a duty to subordinate one’s own self-interests entirely (as is the case where someone acts in a fiduciary position) or to prefer the interests of the other contracting party.
It seems, therefore, that a party that agrees to act in good faith must recognise and respect the legitimate interests of the other and behave in a way that will allow each of them to enjoy the anticipated benefits of their agreement. Consequently, neither party can be required to relinquish freely negotiated financial advantages that are clearly embedded in their agreement.
The developer had suggested a revision to the revenue-sharing agreement that would result in the seller “taking a hit of about £2.8m”. The seller was not in breach of its obligation to act in good faith by refusing to accept or discuss this proposal, and was entitled to stand by the revenue-sharing arrangements laid down in the development agreement.
Consequently, the developer had not been entitled to behave as though the development agreement had been terminated, and it was the developer’s refusal to proceed with the development that led to the termination of the contractual relationship between the parties.
Allyson Colby is a property law consultant
