You may or may not be aware that there is no general duty of good faith in English contract law.
Sometimes though, a duty of good faith will be implied by the courts into certain categories of contracts – examples of these in the past have included insurance, employment and partnership agreements.
While the court will not imply a duty of good faith into a commercial contract routinely, contracts do still include express obligations of good faith in their contracts, which then fall to the courts to determine what it means, as happened in the recent case of Re Compound Photonics Group Ltd..
In this case, minority shareholders sought to claim that they had been unfairly prejudiced by the majority investors’ actions, which led to the removal and resignation of two key directors. The minority claimed that there had been an agreement that the two directors were protected from being removed and that removal of the directors constituted a breach of the good faith obligation in the shareholders’ agreement.
At trial, the judge agreed with the minority shareholders, but that judgment was then sent to the Court of Appeal. The key points from the appeal were:
- Good faith clauses must (like any other contract clause) be interpreted in the context in which they are used. Seeking to draw general principles from cases decided on other facts was not appropriate, nor was applying principles in a formulaic way in every case;.
- It wasn’t appropriate to use good faith concepts from other legal systems when the English courts had resisted creating a general duty of good faith as a matter of law;
- It was not correct on the facts of this case to say that the parties had agreed that the two directors were protected from being removed. If this were the case, then this should have been expressly made clear in the company’s articles and shareholders’ agreement; and
- A good faith clause cannot be presumed to prescribe how the parties should behave or prevent them from changing the original structure.
Points to note when thinking about drafting or agreeing a contract would be:
- State what you want to achieve clearly in the contract – if giving up rights or following procedures, get this set out clearly and unambiguously.
- The courts will assume that parties do not intend to forgo their legal rights unless they clearly agree to.
- If is important to note that in some cases the courts may recognise an implied contractual duty to act in good faith, for example where a party has a discretion to make decisions that affect other parties to the contract, the courts may imply a duty to act in good faith and not irrationally, unreasonably or capriciously. on a case-by-case basis, depending on the kind of contractual decision-making power a party has. It is likely to be very difficult to exclude the duty but, if you wished to do so, only the most clear and unambiguous language should be used.
While a good faith clause clearly can bring sense of a duty of honesty (and may prohibit bad faith conduct which falls short of dishonesty, that may as far as its goes in terms of any other requirements.
It therefore remains the case that there is no minimum standard applicable to all good faith clauses – the requirements of an express good faith clause must be derived as a matter of interpretation or implication from the other terms of the agreement in question.
So, any obligation of good faith included in an agreement will be interpreted in the context of that agreement.
This feels like an area of law that will develop.
Regards to all
R
