Good faith / duress

When will the Court imply a duty of good faith?

The facts

In 2008, Al Nehayan entered into an oral joint-venture with Mr Kent, to invest in Mr Kent's hotel business (Aquis) as an equal shareholder.  Al Nehayan's investment was later expanded to include an online travel business called YouTravel.

Al Nehayan (through his representatives) provided further support by way of loans and share capital to the businesses over the years as they experienced financial difficulties.  By April 2012, Al Nehayan's representatives sought to separate his interest from Mr Kent's by restructuring Aquis and YouTravel and seeking repayment of Al Nehayan's contributions.  After meetings, where Mr Kent was allegedly threatened with physical violence, he made two agreements with Al Nehayan to implement this proposal, a promissory note and a framework agreement (the Agreements).

Al Nehayan later sued Mr Kent for payments he claimed were owed under the Agreements.  Mr Kent counterclaimed on the basis that, under the original joint venture, Al Nehayan owed Mr Kent various fiduciary and contractual duties, including a duty to act in good faith and that, but for breaches of these duties, Mr Kent would not have entered into the Agreements.  Mr Kent also claimed that he entered into the Agreements by duress, and that this duress was actionable.

The decision

The Court held that Al Nehayan was not entitled to be paid sums under the framework agreement, but was entitled to damages of the value of the promissory note. 

The Court also accepted various elements of Mr Kent's counterclaim, concluding that:

• Al Nehayan did not owe any fiduciary duties to Mr Kent;
• due to the nature of the parties' relationships, as participants in a joint-venture, it was essential to imply a duty of good faith into the contract to give effect to the parties' reasonable expectations.The Court viewed the relationship as "a classic instance of a relational contract" in which 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";
• Al Nehayan's representatives induced Mr Kent to enter the Agreements by conduct which breached the implied contractual duty of good faith;
• this inducement also amounted to duress.No legal basis for demanding repayment by Mr Kent was identified, meaning the demand was illegitimate.This illegitimate demand was reinforced with threats to Mr Kent;
• Mr Kent's loss was the entry into the Agreements.This meant that any payment under the promissory note made by Mr Kent to Al Nehayan would give rise to an equal and opposite liability of Al Nehayan to Mr Kent.

The overall effect of the Court's finding was that neither party was entitled to recover money from the other.

Why is this important?

This decision is an example of the Court finding that a contractual duty of good faith should be implied, as well as finding that a joint venture arrangement is a "relational contract" that gives rise to higher standards than ordinary commercial dealings.  The Judge (Leggatt J) also found an implied duty of good faith in Yam Seng, which involved a long term distribution agreement – although this approach (including as to "relational contracts") has not found favour with the Court of Appeal.

Any practical tips?

Express obligations to provide information, cooperate, etc will always be preferable to relying on implied terms, particularly as to good faith.  But bear in mind that there may still be a willingness, at least among some judges, to find a duty of good faith to deal with unreasonable or unconscionable behaviour – particularly in long term or so-called "relational contracts".