Obligation to act in ‘Utmost Good Faith’

The Court of Appeal of the Supreme Court of Queensland in Sentinel Robina Office Pty Ltd v Clarence Property Corporation Ltd [2018] QCA 314 considered the scope of a contractual obligation to act in ‘utmost good faith’. The court held that the obligation to act in ‘utmost good faith’ was limited to the parties’ respective dealings with each other under a deed and did not have a broader application to conduct not relevant to the deed.

The appellant, Sentinel Robina Office Pty Ltd (Sentinel) and the respondent, Clarence Property Corporation Ltd (Clarence) were joint owners of a commercial property in Queensland, and had entered into a deed in relation to shared ownership of the property. The deed provided that:

16.9 Good faith and conflicts of interest(a) 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…

Clarence, in seeking to fill a property manager position for a separate property it owned, offered the position to Mr Kennedy, a senior representative of Sentinel’s subsidiary company. At that time, Mr Kennedy managed the Queensland commercial property the subject of the deed. Mr Kennedy accepted the position and Clarence notified Sentinel of this after Mr Kennedy’s acceptance of the role, preventing Sentinel from taking steps to retain Mr Kennedy. Sentinel contended that Clarence’s actions in hiring Mr Kennedy damaged the relationship of trust between the parties and was a breach of Clarence’s obligation to act in ‘utmost good faith’, as required by the deed.

At first instance the trial judge, in finding for Clarence, stated that its actions were not ‘in the course of the co-owners’ respective dealings with each other‘ and therefore there was no breach of the obligation to act in ‘utmost good faith.’ Sentinel appealed this decision.

On appeal, President Sofronoff, with whom Philippides JA and Davis J agreed, held that the obligation to act in ‘utmost good faith’ was only ‘concerned with the relationship between the parties created by the deed and with the respective dealings with each other under the deed‘.

The factors which the Court of Appeal relied upon in finding that Clarence had not breached its obligation to act in ‘utmost good faith’ in hiring Mr Kennedy included the following:

•   the impugned conduct was not directed towards the bargain of the parties, and therefore was ‘contractually irrelevant</em>’;

•   since Clarence’s conduct did not bear any relationship to the bargain as noted in the deed, its conduct did not engage the obligation to act in ‘utmost good faith’; and

•   the reason for Mr Kennedy’s employment was due to his competence as a property manager, and not because of his position with the appellant.

The full decision can be found here.