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Court implies duty of good faith in “relational” contract

26 June 2018

The courts may be more willing to imply a duty of good faith into joint venture agreements, following a recent High Court case.

In Al Nehyan v Kent [2018] EWHC 333 (Comm), Lord Justice Leggatt ruled that certain types of joint venture agreement fell into a special category of contract into which a duty of a good faith could be implied – so called “relational” agreements.

The judgement, which is likely to provoke widespread debate among commentators and practitioners, could have significant implications for the development of English contract law, which has traditionally been reluctant to adopt a general doctrine of good faith.

The facts

In October 2008, Sheikh Tahnoon Al Nehayan (Sheikh Tahnoon), a member of the Royal Family of Abu Dhabi and John Kent, a Greek businessman, entered into an oral contract pursuant to which Sheikh Tahnoon agreed to invest in Mr Kent’s hotel business, known as Aquis, as an equal shareholder. Their venture was later expanded in 2010 to include an online travel business called YouTravel.

Over the next few years, the businesses experienced significant financial difficulties and Sheikh Tahnoon contributed further financial support in the form of loans and share capital.

By early April 2012, things were still going badly. Sheikh Tahnoon decided that he wanted to separate his interest from that of Mr Kent's and a scheme was devised to restructure the Aquis and YouTravel companies and return part of Sheikh Tahnoon's capital contribution.

Following a series of meetings, Mr Kent entered into two agreements to implement this scheme: a promissory note (dealing with the repayment of the capital contribution) and a framework agreement (dealing with the demerger of the businesses) (the Agreements).

Mr Kent failed to pay the sums allegedly owed under the Agreements and Sheikh Tahnoon brought proceedings for breach of contract. However, in the same proceedings, Mr Kent advanced various counterclaims, including one that he and the Sheikh owed each other fiduciary duties, including a duty to act in good faith, and that Sheikh Tahnoon was in breach of this duty.

The judgment

Leggatt LJ rejected Mr Kent’s counterclaim that the parties owed each other fiduciary duties, but instead held that they were participants in a joint venture of a type into which a duty of good faith could be implied.

Referring to his earlier judgment in Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB), Leggatt LJ reiterated that there were categories of contract pursuant to which the parties were committed to collaborating with each other, typically on a long-term basis, in ways which respected the spirit and objective of their venture but which they had not necessarily tried to specify: so called “relational” contracts.

He said that the parties to a relational contract each expected that the other would act with integrity and in a spirit of co-operation. “The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith,” he said.

Referring to the present case, Leggatt LJ said that the parties “naturally and legitimately expected of each other greater candour and cooperation and greater regard for each other’s interests than ordinary commercial parties dealing with each other at arm’s length”. The contract was a “relational contract” and the implication of a duty of good faith was “essential to give effect to the parties’ reasonable expectations”, he said.

As a consequence, Sheikh Tahnoon’s claim (for breach of the Promissory Note; his claim for breach of the Framework Agreement failed as a matter of interpretation) failed, as the court found him to be in breach of an implied duty to act in good faith. (He had, among other things, deliberately misled Mr Kent in various ways when Mr Kent was trying to negotiate a rescue package for the businesses with a third party. The court also upheld another counterclaim by Mr Kent that he had been forced to enter into the Agreements under duress).

The impact

The decision in Al Nehayan v Kent is another instance of the courts implying a duty of good faith into a long-term, collaborative, joint venture agreement. Leggatt LJ’s decision in Yam Seng was originally seen as being of limited scope, but this latest decision may herald the further development of the law in this area.

As such, commercial parties to long-term joint venture agreements should take note. In the event of a dispute, the courts may not regard them simply as investors in a commercial venture but rather as partners (in a general sense) trying to achieve a common aim and who owe one another an implied duty to act in good faith.

You can read the case Al Nehayan v Kent [2018] EWHC 333 (Comm) here.

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