Good Faith – can it be relied upon in English Law?
Unlike other jurisdictions, there is no general doctrine of good faith in English contract law and the English courts have been reluctant to imply a duty of good faith into contractual arrangements. The only exception to this has been that the concept of good faith can be used in certain limited categories of contract by law, for example, in a fiduciary relationship. However, the recent case of Al Nehayan v Kent suggests that this law may change in the future.
Al Nehayan v Kent
Sheikh Tahanoon Bin Saeed Bin Sakhhboot Al Nehayan (“Al Nehayan”) entered into an oral joint venture agreement with Mr Kent (the “JV”). Al Nehayan agreed to invest into Mr Kent’s hotel business as an equal shareholder and their JV was eventually expanded to also include an online travel business. Over the next few years, the businesses experienced financial difficulties and Mr Kent subsequently entered into agreements providing for payments to be made to Al Nehayan and for a demerger of the businesses (the “Agreements”). When Mr Kent failed to make the payments under the Agreements, Al Nehayan brought proceedings.
Mr Kent counterclaimed that Al Nehayan owed him duties in relation to the JV, including contractual duties and a duty to act in good faith. Mr Kent also claimed duress and argued that, but for breaches of these duties, he would not have entered into the Agreements.
The High Court implied a duty of good faith into the oral JV agreement, saying that the nature of the parties’ relationship made it essential to imply a duty of good faith in the contract to give effect to the parties' reasonable expectations. Further, Mr Kent was induced to enter into the Agreements by conduct which amounted to breach of the implied contractual duty to act in good faith. Mr Kent therefore was entitled to damages to the extent that he had suffered loss as a result of entry into the Agreements. Mr Kent’s claim for duress was also ruled in his favour.
Interestingly, Leggatt LJ referred to his earlier decision in Yam Seng Pte Ltd v International Trade Corp Ltd  EWHC 111 (QB) where he discussed whether or not English law implied a duty to act in good faith. His view was that there was an increasing recognition by the courts that a duty of good faith may readily be implied in a “relational contract”, including some forms of joint venture agreement. This is because, in the joint venture, the parties "naturally and legitimately expected of each other greater candour and co-operation and greater regard for each other's interests than ordinary commercial parties dealing with each other at arm's length". Further, the JV was intended to be a long-term collaboration in which the parties' interests were inter-linked and, albeit only commercially, was viewed as a partnership. The parties did not attempt to formalise the basis of their co-operation in any written contract, but were content to deal with each other entirely informally and on the basis of their mutual trust and confidence that they would each pursue their common project in good faith.
Whilst it would appear that this decision will be useful for those parties that wish to raise defences and counterclaims based on good faith, this approach should be tempered by the fact that Al Nehayan (and the Yam Seng case before it) were decided very much on their specific facts. Indeed, both cases were heard by the same judge, Leggatt LJ, and the concept of an implied term of good faith in a “relational contract” has yet to undergo judicial treatment in the Court of Appeal or Supreme Court. Nonetheless, it would appear that those contractual arrangements driven by trust and reliance, such as a joint venture, might fall within the ambit of a “relational contract” and businesses should bear this in mind. In addition, care should be taken to ensure that any such arrangement is recorded in writing with provisions included for various outcomes. It will always be harder to prove an implied duty of faith where it is seen to contradict the express terms of an agreement that governs a particular event, such as, for example, an exit.
This article was written by Freddie Law. For more information, please contact Freddie on +44 (0)20 7427 6522 or at firstname.lastname@example.org
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