Clarence Property Corporation Limited v Sentinel Robina Office Pty Ltd

In this case the parties were jointly involved in the business of commercially leasing a co-owned property. The contract between them included an express obligation to act with the “utmost good faith”. The applicant then ‘enticed’ or ‘poached’ one of the respondents’ employees. It was argued that this amounted to a breach of an express obligation of ‘utmost good faith’. Jackson J traced the history and content of the doctrine of good faith in contract law, before ultimately concluding that, in the context of this case, the obligation to act in good faith only applied to dealings between the parties.

Jackson J

4 May 2018

Background

The applicant and the respondent were joint owners of a commercial office building known as ‘The Rocket’, located in Robina. They carried on a commercial leasing business of that property, with their relationship regulated by a Co-Owners Deed entered into in September 2015. [9]–[13].

In March 2017 the applicant approached and then offered the respondent group of companies’ head of property management, Mr Kennedy, a job. This was done “without any concern for whether the respondent would be inconvenienced or damaged”. Jackson J accepted the characterisation that the applicant had “enticed or secretly enticed Mr Kennedy to leave his employ”. [40]–[47], [93].

That (and another, less noteworthy circumstance) resulted in the respondent alleging that the applicant had breached an express contractual obligation of ‘utmost good faith’.  The respondent then purported to exercise a contractual right to purchase the applicant’s half-interest at an amount determined by a valuer. The applicant sought declaratory relief to the effect that it was not obliged to transfer its interest, on the basis of there being no breach, or due to a defect in the valuation process. The respondent counter-claimed for specific performance. [1]–[2].

Content of ‘utmost good faith’

The respondent alleged there had been a breach of the requirements of cl 16.9 of the Deed, which relevantly provided (at [49]):

“(a)         … the parties agree that in the performance of their respective duties and the exercise of their respective powers under this deed and in their respective dealing with each other, they shall act in the utmost good faith.”

Jackson J outlined the history and meaning of a duty of ‘utmost good faith’, noting its origins as far back as 1766 and the similarities with the doctrine in insurance law (uberrimae fidei) and the law of partnership. [57]–[67]. As to its content in contractual law, his Honour noted the observation of Allsop P (as his Honour then was) in Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268, that it included:

1. (a)obligations to act honestly and with a fidelity to the bargain;
2. (b)obligations not to act dishonestly and not to act to undermine the bargain entered or the substance of the contractual benefit bargained for; [and]
3. (c)an obligation to act reasonably and with fair dealing having regard to the interests of the parties (which will, inevitably, at times conflict) and to the provisions, aims and purposes of the contract, objectively ascertained.

His Honour also cited the Full Court of the Federal Court’s decision in Virk Pty Ltd (in liq) v YUM! Restaurants Australia Pty Ltd [2017] FCAFC 190, which includes the observation that “[t]he contractual and factual context (including the nature of the contract or contextual relationship) is vital to understand what, in any case, is required to be done …”. [73].

Scope of the obligation in this case

Jackson J considered that the “obvious point” that emerged from a consideration of the whole of the terms of the Co-Owners Deed, was that the good faith obligation in this case was “concerned with the relationship between the parties under the deed and their respective dealings with each other under the deed. It is not concerned with other matters”. [75].

Jackson J rejected the argument that the applicant’s offer of employment to Mr Kennedy occurred in the course of the co-owners’ respective dealings with each other under the deed. [100]. A narrow understanding of “dealings under the deed” was warranted, especially because a clause specifically noted that the parties did not intend “to establish a partnership”. [49]. Apart from those aspects of the relationship governed by the deed, “they were both operating autonomously as property investors and managers”. [101]. The autonomy that they enjoyed would include either party acquiring another site and developing it in competition with the co-owners’ business. [102]. By analogy, that enticing Mr Kennedy away from his employment may negatively affect the co-owners’ business, “did not transform that conduct into a dealing with each other under the Co-Owners Deed”. [103].

Counterclaim and outcome

The counterclaim was premised on a breach of cl. 16.9. Nonetheless, his Honour considered that the counterclaim would fail in any event. [125]. That was because, as a prerequisite to exercising the right to buy-out the other party’s interest, a valuation process had to be undertaken. That process required the valuer to call for submissions, and to consider such submissions if made. That had not been done. The valuation was therefore conducted in violation of what amounted to a “right to be heard”. [151]. His Honour considered that such a violation meant that there had been no valuation in accordance with the relevant clause. Accordingly, the respondent was not entitled to give notice that it wished to purchase the applicant’s interest at the amount determined. [125], [152].

It followed that the applicant was entitled to a declaration that there had been no breach of the contract, and that the counterclaim should be dismissed. [154]–[156].

W Isdale