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Case law: Court implies duty to act in good faith into oral joint venture agreement

Parties to, or negotiating, joint ventures or other long-term arrangements should consider whether their agreements are ‘relational contracts’. If they are, there may be an implied duty for the parties to act in good faith, which does not apply in other types of contract.

February 2019

This update was published in Legal Alert - February 2019

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

An investor agreed to take a 50% stake in the hotel and travel business of a hotelier friend as a joint venture. Despite the sums involved, there were no written agreements at this stage.

Shortly afterwards the joint venture encountered significant financial troubles and the investor, despite having agreed several times to make further investments, decided to withdraw. He and the hotelier signed an agreement to demerge the business, and a promissory note whereby the hotelier agreed to repay a proportion of the investor’s money.

The investor had, however, engaged in what the Court later called ‘furtive and opportunistic conduct’ as the financial situation worsened: trying to sell his stake without consulting with the hotelier and trying to use his shareholding to gain an advantage over the hotelier. There were also allegations the investor’s advisors made physical threats against the hotelier.

The investor sued the hotelier for the return of his investment, valued at €15m. One of the hotelier’s allegations was that the investor had acted in breach of a duty of good faith, which should be implied into the oral joint venture agreement.

Traditionally, the courts refuse to imply a duty of good faith into commercial contracts. However, the Court ruled that this contract – a long-term oral agreement between friends - was a ‘relational contract’. This meant there was an implied contractual duty on them both to act in good faith. The Court defined relational contracts as contracts that ‘require a high degree of communication, cooperation and predictable performance based on mutual trust and confidence and involve expectations of loyalty [which are] implicit’

The Court ruled that the investor’s conduct meant they had breached this duty of good faith.

Operative date

  • Now

Recommendation

  • Parties in, or negotiating long-term arrangements, joint ventures and the like should consider whether their agreements are ‘relational contracts’ because if they are, there may be an implied duty for the parties to act in good faith which does not apply in other types of contract.

Case ref: Sheikh Tahnoon Bin Saeed Bin Shakhboot Al Nehayan v Ioannis Kent [2018] EWHC 333

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.

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