Commercial agreements frequently contain broad statements about each parties’ obligations, including that each party must take all reasonable or necessary steps to achieve the purpose of the agreement or venture.
Where a party has an express contractual obligation to “take all necessary steps”, what exactly does this mean?
Rankin Investments (Qld) Pty Ltd & Anor v CMC Property Pty Ltd & Ors [2021] QCA 156 dealt with this issue.
Facts
The parties entered into a joint venture agreement about the development of land well known as the Big Pineapple on the Sunshine Coast.
The corporate vehicle for the joint venture was Big Pineapple Corporation Pty Ltd (the Company) as trustee for the Big Pineapple Unit Trust (BPUT), in which each of the joint venture parties held 50% interest.
The joint venture agreement required the parties to “take all necessary steps” to give full effect to the agreement.
The joint venturers were bound by decisions of the board of Company
Unilateral stop work notice constituted a breach
The Company engaged consultants to carry out work. Upon a disagreement arising between the joint venture parties, one of the joint venturers sent emails directing those consultants to stop work.
The stop work direction was sent unilaterally, and without the authority of the Company. It was done without the knowledge or consent of the other joint venturer (the respondents to the appeal) and without the approval of the Company’s board.
The effect of that direction was to prevent the carrying out of resolutions of the Company.
The other party (Respondents) issued a Notice of Default and sought to terminate the joint venture.
The party who issued the stop work notice filed an originating application seeking declarations that the two Default Notices issued were each not a valid and enforceable notice.
Terms of the Contract
The Court examined the contractual terms and considered the meaning and effect of Clause 6 -Undertaking
6.1 Each of the parties undertakes with the other:
a) to take all necessary steps on its part to give full effect to the provisions of this Agreement;
b) not to engage (whether alone or in association with others) in any activity in respect of the Land except as provided or authorised by this Agreement or as agreed in writing by the parties;
c) not to do or cause or permit to be done any act matter or thing whereby in any way the continued enjoyment of the Land for the purposes of the Joint Venture might be jeopardised; and
d) to be just and faithful in all of its activities and dealings with the others.
Decision
The trial judge found in favour of the Respondents and the Court of Appeal agreed on the basis that the unilateral notice to the consultants to stop work was a breach of the obligation to “take all necessary steps” and the Default Notices and subsequent termination was valid.
Applegarth J, with whom Bond JA and Sofronoff P agreed, said:
“In my view, the obligation to “take all necessary steps to give full effect to the provisions of this Agreement” imposes, by implication, a correlative duty to not act in a way that is inconsistent with the step being taken. This is a necessary implication to enable a party to enjoy the benefit of the obligation imposed on each other party by cl 6.1(a). A good example is the obligation to not tear up a document that cl 6.1(a) requires a party to sign.
Such an implication is derived from the express term to take necessary steps. Without that implication, a party who has signed a document it is obliged by cl 6.1(a) to sign would be free to then tear it up. This would produce a plainly perverse result that would hinder or prevent the fulfilment of the purpose of the express term.
Therefore, I conclude that, as a matter of construction, cl 6.1(a) is capable of giving rise to a negative stipulation by way of implication. The implication is that the party will not do things that are inconsistent with the obligation to take necessary steps.”
This case is a good illustration of the principal that a party obliged to “take all reasonable steps”, to give effect to a commercial agreement, has an implied obligation not to do anything or omit from doing anything which is inconsistent with that obligation.
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