Maggiotto Building Concepts v Gordon

Maggiotto Building Concepts Pty Ltd (the applicant) sought leave to appeal to the High Court of Australia against a decision of the Full Federal Court. The dispute concerned the interpretation of a clause in a building contract, specifically whether it provided for an implied term that the builder would exercise its discretion to approve variations reasonably and in good faith. The applicant argued that the Full Federal Court had erred in finding that such an implied term existed.

The central legal issue before the High Court was whether, in the context of a building contract where one party (the builder) had a contractual right to approve or reject variations proposed by the other party (the owner), there was an implied term that such approval or rejection must be exercised reasonably and in good faith. This involved considering the principles of contractual interpretation and the circumstances in which implied terms are necessary to give business efficacy to a contract.

Gleeson CJ and Gummow J, in dismissing the application for leave to appeal, held that the Full Federal Court had correctly identified and applied the relevant legal principles. Their Honours noted that while a contract may grant a party a discretion, that discretion is generally understood to be subject to an implied obligation to exercise it reasonably and in good faith, unless the contract expressly or by necessary implication provides otherwise. The court found that the terms of the building contract in question did not displace this implied obligation, and therefore the builder was bound to exercise its discretion regarding variations in a manner that was not arbitrary or capricious.