Sheikh Tahnoon and Mr Kent entered into a joint venture to run a luxury hotel business, and subsequently, an online travel business. But, because of business difficulties, they entered into a framework agreement, to demerge the business, and Mr Kent entered into a promissory note with Sheikh Tahnoon, agreeing to repay him certain sums. In proceedings brought by Sheikh Tahnoon, however, Mr Kent claimed that his consent to the agreements was obtained by unfair means and in breach of fiduciary duties and/or a contractual duty of good faith. But was there a duty of good faith?
Lord Justice Leggatt noted growing recognition that such a duty may readily be implied in a relational contract, i.e. a category of contract where the parties are committed to collaborating with each other, typically on a long term basis, in ways which respect the spirit and objectives of their venture but which they have not tried, and which it may be impossible, to specify, exhaustively in a written contract. Such ‘relational’ contracts involve trust and confidence but of a different kind from that involved in fiduciary relationships. The trust is not in the loyal subordination by one party of its own interests to those of another. It is trust that the other party will act with integrity and in a spirit of cooperation. The legitimate expectations which the law should protect in relationships of this kind are embodied in the normative standard of good faith. Examples of such relational contracts might include some joint venture agreements.
The contract between Sheikh Tahnoon and Mr Kent seemed to the judge to be a classic instance of a relational contract. The implication of a duty of good faith was essential to give effect to the parties’ reasonable expectations and satisfied the standard business necessity test for implication of a contract term. The same conclusion could also be reached by applying the Liverpool City Council v Irwin test 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. The court went on to identify two forms of furtive or opportunistic conduct which seemed incompatible with good faith in the circumstances of the case.