In this decision, the Court of Appeal considered whether an express covenant to “act in the utmost good faith” was breached by a party to a deed – which regulated their dealings in the nature of a joint venture – in “poaching” a senior employee of a subsidiary company of the other party. In finding that there was no breach of the obligation in this context, the court provided valuable guidance on the interpretation of an express term to act in the utmost good faith.
Sofronoff P and Philippides JA and Davis J
13 November 2018
The appellant and the respondent were parties to a deed which regulated their respective rights and obligations in relation to their shared ownership of a building on the Gold Coast. . The commercial arrangement was akin to a joint venture. . Sentinel Property Services Pty Ltd, which was controlled by the appellant, was appointed as the manager ("the managing company"). . Mr Kennedy was an employee of a subsidiary of the appellant and was appointed to act as the most senior representative of the managing company. .
In February 2017 the respondent offered Mr Kennedy a position as its Head of Property, with an increase in pay. . Mr Kennedy resigned from his existing position and took up his new employment. . There was no disclosure of any of this to the appellant until it was too late to prevent Mr Kennedy's departure. .
Clause 16.9(a) of the deed provided:
"Without limiting the generality of any other provision of this deed 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 dealings with each other, they shall act in the utmost good faith." .
The appellant contended that the respondent's recruitment of Mr Kennedy was a breach of cl 16.9(a). . It contended that the respondent acted secretly and thereby denied the appellant any opportunity to make a counter offer to Mr Kennedy to persuade him to remain with the appellant. . It was said that that corroded the parties’ relationship of trust and was accordingly a breach of cl 16.9(a). . At first instance, Jackson J concluded that the respondent's secret recruitment of Mr Kennedy did not constitute a breach of cl 16.9(a). .
On appeal, Sofronoff P (with whom Philippides JA and Davis J agreed) held that the obligation to act in utmost good faith imposed by cl 16.9(a) was concerned with the relationship between the parties created by the deed and with their respective dealings with each other under the deed. . Approving of the statement of principle from Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service  NSWCA 268, his Honour noted that, at the heart of the principles approved in that case, “is that the duty of good faith is directed towards the bargain between the parties and their mutual contractual objectives" and that "[u]nless the impugned conduct is directed towards the bargain, or has an effect upon the bargain, or was intended to have an effect upon the bargain, it is contractually irrelevant". .
His Honour held that the respondent’s recruitment and employment of Mr Kennedy "had nothing whatsoever to do with the relationship of the appellant and respondent under the deed" and that it was "purely incidental that Mr Kennedy was employed in the management of the joint venture business". . He noted that Mr Kennedy was recruited by the respondent not because he was the manager of the joint venture business, but because the respondent judged him to be an able manager of commercial property. . His Honour also noted that Mr Kennedy's departure did not have any effect upon the appellant vis-a-vis the venture business or the appellant's own business. . That being the case, his Honour concluded that cl 16.9(a) was not engaged, and the appeal was dismissed. , .
M J Hafeez-Baig