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Bound by implied duties: be aware before making a deal

21 Mar 2018

 

Up until recently, the courts have been very reluctant to imply a general duty of good faith in a contract. However, parties should now be aware that the court may do so when the facts make it necessary.

 

In Al Nehayan v Kent [2018] EWHC 333 (Comm), the High Court considered and implied a duty of good faith into an oral joint venture contract.

 

Facts

 

In October 2008, Sheikh Tahnoon entered into an oral contract to invest in Mr Kent’s hotel business as an equal shareholder.  The business started to experience financial difficulties and Sheikh Tahnoon (through his representatives) contributed further financial support.

 

By early April 2012, Sheikh Tahnoon decided that he was no longer going to support the company. His representatives devised a scheme to restructure the company. Following a series of meetings and correspondence, which included alleged physical threats of violence, Mr Kent entered into two agreements. The agreements required Mr Kent to repay Sheikh Tahnoon's capital contribution in annual instalments and provided for the demerger of the business.

 

Sheikh Tahnoon brought proceedings claiming that Mr Kent had failed to pay the sums owed under the agreements. The court held that Sheikh Tahnoon was only entitled to damages to the value of the promissory note (which formed part of the agreements).

 

Mr Kent advanced a counterclaim that Sheikh Tahnoon owed him fiduciary duties and contractual duties, including a duty to act in good faith. Mr Kent argued that but for the breaches he would not have entered into the agreements.

 

Decision

 

The High Court concluded that:

 

  1. The parties were participants in a joint venture, but Sheikh Tahnoon did not owe any fiduciary duties to Mr Kent.

  2. The nature of their relationship, being a classic relational contract as 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”, made it essential to imply a duty of good faith in the contract to give effect to the parties' reasonable expectations. There was no written contract and the parties were content to deal with each other entirely informally and on the basis of their mutual trust and confidence.  The judge determined that the duty of good faith must be implied to give effect to the parties' reasonable expectations.

  3. 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. This also amounted to duress.

  4. Mr Kent was entitled to damages in tort and for breach of contract, to the extent that he had suffered loss as a result of entry into the agreements.

  5. The loss suffered by Mr Kent as a result of entering into the agreements was held to be the value of the promissory note.

 

Any payment by Mr Kent under the promissory note would therefore give rise to an equal and opposite liability of Sheikh Tahnoon. The primary claim under the promissory note therefore fell and neither party was entitled to recover money from the other.

 

Comment

 

The courts will only imply such a duty of good faith where the business efficacy test is satisfied.  This means where the duty must be implied to allow the contract and relationship between the parties to work.

 

Parties to long-term oral contracts and ventures should be aware that the courts may be willing to imply a duty of good faith and that this duty may involve additional obligations.

 

It is better to set out the terms of the contract explicitly in writing.

 

If you have any queries or require any assistance in starting up or carry on your business, please contact Paul Bell on 0191 232 0283.

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Short Richardson and Forth Solicitors Limited is a private limited company registered in England and Wales under company number 10572065, authorised and regulated by the Solicitors Regulation Authority No 637150.

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