High Court implies a duty on contracting parties to act with “honesty and integrity”
In D&G Cars Ltd (D&G) v Essex Police Authority (EPA)  EWHC 226 the judge set out what in his view was the legal basis for implying a term into a contract that the parties would act with “honesty and integrity”.
D&G claimed, amongst other things, that EPA had wrongly terminated a contract which required D&G to recover, store and dispose of vehicles on EPA’s behalf. EPA contended that it had rightly terminated the contract for two reasons: D&G had breached an express condition in the contract relating to the disposal of vehicles; and an implied condition that D&G would conduct itself in good faith, or, as more frequently expressed in the proceedings, with honesty and integrity in undertaking the duties and observing the requirements of the contract.
The judge found that a number of features of the contract clearly indicated an implied term that the parties would act with honesty and integrity in operating the contract. Those features were:
- the contract was for an initial term of five years, a relatively long period, during which there were expected to be a very large number of individual transactions;
- the substance of the contract involved acting on behalf of a law enforcement agency and dealing with the public’s property;
- the property might need to be returned to members of the public; and
- the property might form part of the evidence for criminal investigations and potential prosecutions.
The judge also considered that the implied term extended beyond D&G’s directors’ acts, to the acts and omissions of D&G’s managerial and supervisory staff.
Impact – it is clear from recent caselaw (e.g. Compass Group UK and Ireland Ltd (t/a Medirest) v Mid Essex Hospital Services NHS Trust  All ER (D) 200 (Mar)) that courts are willing to uphold an express provision of good faith in a binding agreement. What is also clear is that they are open to implying a duty of good faith, or its equivalent, in certain circumstances where the contract has a “relational” context (e.g. Yam Seng Pte Ltd v International Trade Corporation Ltd  EWHC 111 and Bristol Groundschool Ltd v Intelligent Data Capture Ltd & Ors  EWHC 2145 (Ch)). In Yam Seng, the court considered contracts where the parties had an ongoing relationship to be “relational” contracts, for example “joint venture agreements, franchise agreements and long term distributorship agreements”. In D&G v EPA the judge felt the nature of the contract was a “‘relational’ contract par excellence”.
It is worth noting however that there continues to be no general doctrine of good faith under English law. Considering the recent case of Yam Seng the judge noted that “both the existence and the content of an implied condition in relation to honesty and integrity is highly sensitive to the context of the contract itself”. In this particular case the existence of the implied term to act with honesty and integrity had, in any event, been accepted by both parties.
Revisions to the Pre-Emption Group’s “Statement of Principles” – 12 March 2015
The Pre-Emption Group has issued a revised statement of principles aimed at, and applicable to, companies listed on the main market of the London Stock Exchange seeking to disapply pre-emption rights (the Principles). There are a number of key changes since the principles were last issued in 2008 including:
- scope – the Principles now apply to all companies listed on the main market, not just UK companies;
- pre-emption limits – the pre-existing pre-emption limits remain unchanged. Requests for the disapplication of pre-emption rights continue to be likely to be considered as routine by investors if the company is seeking authority to issue non-pre-emptively no more than 5 per cent of the ordinary share capital in any one year or 7.5 per cent in any rolling three year period. However the revised Principles also permit authority to be requested for an additional 5 per cent per year if the company confirms that it intends to use it only in connection with “an acquisition or specified capital investment which is announced contemporaneously with the issue, or which has taken place in the preceding six-month period and is disclosed in the announcement of the issue”;
- cashbox transactions – the Principles (echoing previous wording) are specifically stated to apply to all issues of equity securities undertaken to raise cash regardless of the form of the transaction. However the Principles give a new example of their application to cashbox transactions which, whilst falling outside the ambit of statutory pre- emption, are nonetheless considered to be within the scope of the Principles; and
- discounts – the revised Principles contain new guidance on calculating discounts and state that a “backstop” underwriting commitment entered into before carrying out a bookbuilt equity issue will not typically be regarded as problematic, provided that at execution of the underwriting agreement it was not expected that the underwriter would acquire securities pursuant to its commitment at a discount of more than 5 per cent.
Impact – the additional detail and clarity in the Principles, along with the ability to request a general disapplication to assist with financing an acquisition or capital investment may be welcomed. However the emphasis on compliance with the letter and spirit of the Principles (paragraph 5, Part 1) may cause concern in light of the statement that “Companies that do not comply with these principles are likely to find that their shareholders are less inclined to approve subsequent requests for a general disapplication”.
Background - statutory pre-emption rights apply when UK companies seek to issue new shares for cash. Unless shareholders have agreed otherwise, any new shares issued for cash must first be offered to existing shareholders in proportion to their current shareholding. In addition, companies listed on the main market are also subject to the FCA’s Listing Rules which require them to have pre-emption rights at least equivalent to the statutory rights. The Pre-Emption Guidelines were first published in 1987 by the original Pre-Emption Group to provide guidance on the considerations to be taken into account when assessing the case for disapplying pre- emption rights. The Guidelines were replaced with a Statement of Principles in 2006, subsequently updated in 2008. The Pre-Emption Group was re-formed in 2015 to consider market changes, developments in best practice and whether consequential revisions to the Statement of Principles were appropriate.
- Details of the business relevant aspects of this week’s Budget (including changes to the availability of entrepreneur’s relief) are available here.
- The Small Business, Enterprise and Employment Bill received its third reading in the House of Lords this week. No substantive amendments have been made to the provisions governing key proposed company law changes since the completion of the Lords Report stage (reported last week). The Bill will go back to the House of Commons for consideration of the Lords amendments. It is scheduled to “ping pong” between the two houses on 24 March, until it is agreed. Once the Commons and Lords agree on the final version of the Bill, it can receive Royal Assent. A provisional implementation plan for the main corporate aspects of the Bill is available here.
- The FCA has confirmed that communications issued through social media channels have the potential to be considered financial promotions.