Express Duty Of Good Faith Was Not Unlimited
It’s a common misconception that where there is a formalised business relationship, one commercial party owes a duty of good faith to the other. Not so, save in specific circumstances – for instance, where there is a so-called ‘relational’ contract where the parties are in a long-term relationship heavily based on mutual trust.
In a recent case, the courts considered the duty of good faith in circumstances where it was an express duty in one commercial agreement, but not in another (but related) agreement.
What’s the background?
A property management company (Sibner Capital Ltd) provided a loan to the borrower and entered into a joint venture agreement with him and the loan guarantors. The JV agreement included an express term requiring the parties to act in good faith, so long it would not restrict the lender’s rights under its loan facility.
The facility agreement itself included a term to the effect that Sibner has “absolute discretion” to
“accept a sum less than the Tranche A commitment [minimum loan repayment of £300,000] plus interest on the Tranche A Repayment Date in satisfaction of the Borrower’s obligation to repay the Tranche A Facility on that Date…”
In the event, the borrower failed to pay the balance owed to the lender by the agreed date, so the lender served statutory demands on the guarantors. The guarantors succeeded in having the statutory demands set aside at first instance, but Sibner won on appeal.
The lender argued that its “absolute discretion” was unrestricted by any implied term of good faith under the facility agreement. The High Court observed, first, that the facility agreement expressly stated that Sibner’s discretion was absolute and unqualified as to how much was repayable.
Second, though the JV agreement contained an express duty to act in good faith, it also stated that this would not restrict Sibner’s rights under the facility agreement. The guarantors’ claim that there was a duty of good faith failed and the lender was free to pursue the outstanding amounts.
Importantly, the court took into account the fact that the parties were all commercially experienced with equal bargaining power.
Key takeaway
There are important lessons to take from this ruling:
Clarity as to the extent to which a party is to comply with its contractual duties is vital, even more so where there are related commercial agreements and a potential conflict could arise
A duty of good faith will not be implied into a contract unless it is obviously necessary, or is required in order to give business efficacy to the contract
Robust advice should be taken when negotiating and drafting commercial contracts, however experienced you are in business
1Sibner Capital Limited v Neil David Martin Jarvis & Suzanne Jane Hughes [2022] EWHC 3273
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you