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Joint ventures and implied duties of good faith

Nehayan v Kent [2018] EWHC 333 (Comm) is the latest case in a growing line of authorities in the UK on the implication of good faith in "relational" commercial contracts, such as joint ventures, franchise agreements and distribution agreements.

The Facts

Sheihk Tahnoon Bin Saeed Bin Shakhboot Al Nehayan (Sheihk Tahnoon) and Mr Kent entered into a joint venture to develop luxury hotel and online travel businesses. Mr Kent managed the business and Sheihk Tahnoon provided funding. When the businesses started to fail, Sheihk Tahnoon sought to extricate himself from the business. The parties entered into a framework agreement to demerge the business. Sheihk Tahnoon was also convinced that Mr Kent had "swindled" Sheihk Tahnoon and Mr Kent entered into a promissory note agreeing to repay Sheihk Tahnoon some of his losses. In addition to these agreements, Sheihk Tahnoon's representatives were conducting separate negotiations with a third party to sell Sheihk Tahnoon's majority shareholding in one of the companies, instead of transferring it to Mr Kent as part of the separation, something Mr Kent was not aware of at the time.

Mr Kent was unable to keep up with the payments due under the framework agreement and promissory note and thus Sheihk Tahnoon issued a claim before the courts for these sums which totalled approximately €15 million. In those proceedings, Mr Kent claimed that his consent to the framework agreement and promissory note was obtained by unfair means (including physical duress and other illegitimate pressures). Mr Kent counterclaimed that Sheihk Tahnoon had breached his fiduciary duties and/or a contractual duty of good faith.

"Relational Contracts"

In determining whether a general duty of good faith could be implied in such circumstances, Lord Justice Leggatt pointed to his own previous judgment in Yam Seng Pte Ltd v International Trade Corp [2013] EWHC 111 (QB). The ruling in that case (on which we have previously commented) held that a duty of good faith could be implied into ordinary commercial contracts, and whilst it should not be implied by default, it was more likely to be implied into "relational" contracts – i.e. long term commercial relationships which require a high degree of trust and cooperation, like franchise agreements, joint ventures and distribution agreements.

In this case, Lord Justice Leggatt referred to the chain of jurisprudence that has since developed in support of his previous judgment, including the case of Bristol Groundschool Ltd v Intelligent Data Capture Ltd [2014] EWHC 2145, where a duty of good faith had been implied into a joint venture relationship.

Lord Justice Leggatt held that the facts of Nehayan v Kent are a classic instance of a relational contract, stating that "the implication of a duty of good faith in the contract is essential to give effect to the parties' reasonable expectations". Lord Justice Leggatt also noted that the facts satisfied the business necessity test for implication of a contract term, as well as the test from Liverpool City Council v Irwin [1976] AC 239 for the implication of a term in law, on the basis that the nature of the contract as a relational contract implicitly requires (in the absence of a contrary indication) treating it as involving an obligation of good faith.

Lord Justice Leggatt rejected Sheihk Tahnoon's claim in its entirety. Mr Kent was successful in his counter claim to recover as damages the sums which he would otherwise have been liable to pay under the framework agreement and promissory note, but in the circumstances was held not to have suffered any loss and therefore was not awarded a money judgment. Mr Kent was not successful in his counter claim for an account of profits based on alleged breaches of fiduciary duties owed by Sheihk Tahnoon. Sheihk Tahnoon was ordered to pay 70% of Mr Kent's costs of the proceedings (excluding his costs of obtaining expert evidence), reflecting the fact that Mr Kent was overall the successful party, but did not succeed on all claims.

"Furtive and opportunistic conduct"

Lord Justice Leggatt identified "furtive and opportunistic conduct" as incompatible with the implied duty of good faith. He pointed to Sheikh Tahnoon's attempt to sell part of his interest in the joint venture to a third party, without informing the other beneficial owner. Secondly, he noted that whilst "the parties to the joint venture were generally free to pursue their own interests and did not own an obligation of loyalty to the other, it would be contrary to the obligation to act in good faith for either party to use his position as a shareholder of the companies to obtain a financial benefit for himself at the expense of the other".

The judgment helps to further clarify the position in respect of relational contracts (particularly, joint ventures) and good faith. Whilst this ruling by no means provides that all joint ventures will contain an implied duty of good faith, parties to those where there is a long term relationship with a high degree of trust involved should be careful that their actions are not contrary to the principles of good faith. Parties should be aware of such a risk and if necessary, seek to reduce this risk through careful contractual drafting.

For more information on this topic, please contact Gordon Drakes or your usual contact within Fieldfisher's Brand Development Team.

Co-authored by Alex Harbin.