Joint ventures and an implied duty of good faith
Al Nehayan v Kent
Cases where arguments founded on an implied obligation of good faith rarely succeed but this is an example where such an argument was successful on the facts.
Facts:
The parties entered into a joint venture but it was not the subject of a formal written agreement. In October 2008 Al Nehayan entered into an oral contract to invest in Mr Kent’s hotel business, known as Aquis, as an equal shareholder. Their joint venture was later expanded in 2010 to include an online travel business called YouTravel.
Over the next few years, the businesses started to experience financial difficulties and Al Nehayan contributed, at the request of Mr Kent, further financial support in the form of loans and share capital. By early April 2012, it was decided that Al Nehayan should not support the businesses any longer and should separate his interest from that of Mr Kent's. A scheme was devised to restructure the companies and repay Al Nehayan's capital contribution. Following a series of meetings and correspondence, which included alleged physical threats of violence, Mr Kent entered into two agreements to implement this scheme (Agreements).
When repayment was not forthcoming Al Nehayan issued proceedings. Kent then advanced a counterclaim that as part of their joint venture Al Nehayan owed Kent a contractual duty to act in good faith and that but for breaches of this (and other) duties Kent would not have entered into the Agreements.
Decision:
- The High Court implied a duty of good faith into an oral joint venture ‘contract’. The nature of their relationship made it essential to imply a duty of good faith in the contract to give effect to the parties' reasonable expectations.
- The JV was regarded as a classic instance of a relational contract being “one in which they 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". The JV was intended to be a long-term collaboration in which the parties' interests were inter-linked and, 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.
- The Court found that the claimant's conduct (acting through its representatives) in obtaining the defendant's consent to certain actions and getting him to enter the Agreements (through duress) was a breach of an implied duty of good faith.
Points to Note:
- The Judge in this case, Leggatt LJ, has ‘history’ in this area as he was the Judge who gave judgement in the Yam Seng case.
- Clearly, the complete absence of written documentation to record the basis of the relationship gives the Courts much greater flexibility and discretion to imply over-arching obligations of good faith. The fact that this was essentially an arrangement between two individuals no doubt also helped the Court to come to the conclusion that it did.
- The Judge described a ‘relational contract’ as one in which “the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried to specify, and which it may be impossible to specify, exhaustively in a written contract. Such 'relational' contracts involve trust and confidence. It is trust that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith”.
- This case keeps the debate about so called ‘relational contracts’ and implied duties of good faith bubbling away. What is interesting is that overwhelmingly the cases where a ‘relational contract’ has been found to exist have been described as joint ventures of one type or another.
- The Judge went on to say that “It is unnecessary and perhaps impossible to attempt to spell out an exhaustive description of what this obligation involved”. He did, however then say that “the obligation of fair dealing is not a demanding one and does no more than require a party to refrain from conduct which in the relevant context would be regarded as commercially unacceptable by reasonable and honest people”.