Not renegotiating a bad bargain did not constitute breach of duty of good faith – Gold Group Properties v BDW, High Court

Gold had entered into an agreement with BDW (formerly Barratt Homes) to build some properties on Gold’s land. BDW would pay minimum fee per property and the parties would share revenue. The contract also had a good faith provision under which: the parties agreed with each other that all transactions entered into between the parties would be conducted in good faith; each party should at all times act in good faith towards the other and use all reasonable endeavours to ensure observance of the agreement; and neither party would seek to increase its profit or reduce its losses at the other’s expense.

The credit crunch came along and there were delays by BDW, culminating in Gold purporting to accept BDW’s repudiatory breach of the contract. The High Court agreed with Gold. However, BDW alleged that Gold’s refusal to agree to renegotiate the deal including the minimum prices (to allow the contract to continue after the credit crunch) amounted to a breach of the duty of good faith. The High Court said that was not what was intended by the good faith obligation. Good faith required parties to observe reasonable commercial standards of fair dealing and faithfulness to the agreed common purpose and consistent with the justified expectations of the other party. It did not require one party to renegotiate a contract because the other had made a bad bargain. The duty did not require Gold to give up a freely negotiated financial advantage. The contract also expressly stated that neither party would increase their profits or reduce their losses at the other’s expense.

Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: ‘With the economic downturn, we have seen a lot of people want to get out of agreements that had been entered into in the good times but which did not seem quite so good when the economic climate deteriorated. This is the latest in the line of cases where the courts have shown an unwillingness to interfere to help someone get out of what had become a bad bargain. In another recent case, the Court refused to allow the economic downturn to be a justification to refuse to perform under force majeure. For more on that case, click here: http://www.mablaw.com/2010/01/economic-downturn-not-a-justification-reason-to-invoke-force-majeure-provisions-%e2%80%93-tandrin-aviation-v-aero-toy-store-high-court/.’