Many agreements require the parties to ‘act reasonably’. The courts have not, however, had the opportunity to directly consider what this phrase means until recently. In Lend Lease Pty Ltd v Sugar Australia Pty Ltd [2014] VSC 476, the Supreme Court of Victoria had just such an opportunity.

The facts of the case

Lend Lease and Sugar Australia entered into a construction contract to upgrade a sugar refinement station. As part of the contract, Lend Lease offered a bank guarantee of $4,190,000 to ensure its performance of the contract. Issues affecting performance did ultimately arise, and Sugar Australia attempted to call on the bank guarantee. Lend Lease sought an injunction preventing Sugar Australia from so doing.

The contract in question was a modified version of the General Conditions of Contract AS 4910–2002 for the supply of equipment with installation, a document in general use in the engineering and construction industries. The relevant modified clause was phrased as follows:

5.2 Availability of Security

Any security provided by the Contractor in accordance with the Contract shall be available to the Principal whenever the Principal may claim (acting reasonably) to be entitled to:

i.   the payment of moneys or an indemnity by the Contractor under or in consequence of or in connection with the Contract;

ii.   reimbursement of any moneys paid to others under or in connection with the Contract; or

iii.   other moneys payable by the Contractor to the Principal (whether by way of set-off or otherwise).

…

Lend Lease argued that Sugar Australia was not ‘acting reasonably’.

The parties’ arguments

Sugar Australia argued its case on a two point basis:

1. The words ‘acting reasonably’ were purely subjective and were focused entirely on their motives; if it had a bona fide arguable claim then it was ‘acting reasonably’.
2. Alternatively, if there was an objective element to ‘acting reasonably’, the test must be based on what someone else in Sugar Australia’s position would have done. In short, once it was established that Sugar Australia had a bona fide arguable claim, it would be up to Lend Lease to establish that no reasonable person could have formed that view.

Lend Lease argued that an objective element had to be imported into the test, and that Sugar Australia’s actions failed that test:

1. Lend Lease was not indebted to Sugar Australia, as it had validly terminated the construction contract.
2. Lend Lease’s claims against Sugar Australia exceeded Sugar Australia’s claims against Lend Lease.
3. Lend Lease had a liability cap under the contract which limited its liability to $2,024,215, far short of the bank guarantee amount of $4,190,000.

For any one of the above reasons, Lend Lease submitted that no reasonable person in Sugar Australia’s position could have formed the view that there was a valid claim.

So is ‘acting reasonably’ subjective or objective?

Unfortunately, the court did not conclusively resolve this issue. This is because Lend Lease was only seeking an injunction pending the ultimate determination of the matter.

To succeed in obtaining an injunction, Lend Lease only needed to show that:

• there was a serious question to be tried, and Lend Lease had a sufficient likelihood of success to warrant preservation of the status quo;
• if there was no injunction, Lend Lease would suffer irreparable harm, even if ultimately successful; and
• the balance of convenience favoured the injunction.

The court found in favour of Lend Lease on all three elements and granted the injunction. In regard to the interpretation of ‘acting reasonably’, the court held:

[The case] will in significant part depend upon the proper construction of the words “acting reasonably” found in the clause, and in particular, whether these words are confined to a subjective analysis, or import the concept of an objective assessment.

…

There is a serious question to be tried in the sense that Lend Lease has shown a sufficient likelihood of success to justify in the circumstances the preservation of the status quo pending trial.

ERA Legal will continue to follow the case carefully to see whether the court makes a final determination and, if so, what that determination is.

A final comment

This decision highlights the dangers of compromising and limiting rights in a contract; what may initially seem sweet could end up rotting your teeth.

Whilst a term requiring parties to ‘act reasonably’ may help to form an agreement, it introduces uncertainty into that agreement. Ultimately, it could have serious unintended consequences which result in a dispute arising down the track.