Joint ventures and the implied duty of good faith

23 / 04 / 2018

 

Joint ventures (JVs) have become an increasingly common method by which certain business activities are undertaken. A JV is a commercial arrangement in which two or more parties agree to pool their resources to accomplish certain goals.

In Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent[1] it was held that, in a JV relationship, the claimant (Sheikh Tahnoon) owed the defendant (Mr Kent) a duty of good faith. Generally, English contract law does not recognise a universal implied duty of good faith between contracting parties (see also The implied duty of good faith in commercial contracts in our Winter 2018 In Counsel). To that end, it is necessary to explore what it is about JVs that can lead to such an implication.

The facts of the case

In October 2008 Sheikh Tahnoon, a member of the Royal Family of Abu Dhabi, agreed to invest as an equal shareholder in a hotel business set up by a Greek businessman, Mr Kent, with the aim of establishing a brand of luxury hotels. Sheikh Tahnoon contributed €31.1m of share capital to the business which, by April 2012 was critically short of cash. Representatives of Sheikh Tahnoon decided to separate his interest from that of Mr Kent’s and did so pursuant to a restructuring effected by a framework agreement in order to demerge the business. Mr Kent claimed that, inter alia, he would not have entered into the framework agreement had it not been for a breach of contractual duties of good faith owed to him by Sheikh Tahnoon under the JV relationship.

Fiduciary duties v an implied duty of good faith

It is important to first distinguish the recognition that parties will act with integrity and in a spirit of co-operation (i.e. in good faith) from a fiduciary duty, often seen in trustee/beneficiary and solicitor/client relationships. Parties to such relationships have long been known to owe duties above and beyond what would normally be required in a commercial context, but these are exceptional cases in settled categories of relationships.  As noted by LJ Legatt, they encompass cases where the fiduciary “is not permitted to use their position for their own private advantage, but is required to act unselfishly in what they perceive to be the best interests of their principal“.

It was held that Sheikh Tahnoon, in investing in the business of Mr Kent, was motivated by the hope of making a profit and that the relationship was not such that he would “subordinate that interest to the interests of Mr Kent“. The JV relationship was purely commercial, notwithstanding the friendship that Sheikh Tahnoon and Mr Kent shared (it was established that both holidayed together regularly and developed a strong friendship over the years of their business venture) and as such there was no fiduciary duty owed by Sheikh Tahnoon.

The duty of good faith in JVs

Notwithstanding the above LJ Legatt then went on to consider whether a duty of good faith may be implied into such an arrangement. LJ Legatt commented that there is a growing recognition to imply such a duty into relational contracts; that is, contracts which involve trust and confidence and in which the parties are committed to collaborating with each other. This can clearly be reconciled with JVs “where mutual trust and co-operation are crucial to the success of the venture“.[2]

It was held that the contract made between Sheikh Tahnoon and Mr Kent was a relational contract where the implication of a duty of good faith was essential to give effect to the parties’ business intentions.

Similarly, in Bristol Groundschool Limited v Intelligent Data Capture Limited[3], JVs were specifically characterised as relational contracts. In this case, the parties to the JV worked together for the purpose of producing training manuals for pilots. The claimant produced the text for the manuals, whilst the defendant created the artwork. The claimant then secretly downloaded certain material from the defendant’s database. Whilst there were no terms prohibiting such download in the agreement, it was held that there was an implied term of the JV that required good faith, the test being whether the conduct in question would be regarded as “commercially unacceptable by reasonable and honest people“.

The confidence and trust in relational contracts such as JVs is not such that one party subordinates their interests to those of another, but rather that each party will act in good faith and respect the objectives of their joint venture. They are typically long-term contracts where the parties expect greater collaboration and have a greater regard for each other’s interests than an ordinary commercial relationship.

One can therefore acknowledge the English law principle that there is no implication of good faith in commercial contracts whilst simultaneously recognising the scope for such a duty in a separate sub-category of relational contracts, of which JVs appear to be one.

Practical considerations

Parties looking to enter into a JV should be aware that contracts where mutual trust and commitment are crucial to the success of the venture are likely to be classified as “relational” and in turn therefore open to the implication of duties of good faith.

Such duties cannot be quantified and necessarily may lead to uncertainty in their interpretation. To the extent that parties wish to avoid this in a JV, it may be advisable to specifically exclude such duties in the agreement.

[1] [2018] EWHC 333 (Comm)

[2] See Hewitt on Joint Ventures (6th Edn, 2016) at paras 11-09 to 11-17

[3] [2014] EWHC 2145 (Ch)